[Federal Register Volume 73, Number 22 (Friday, February 1, 2008)]
[Rules and Regulations]
[Pages 6294-6368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-337]



[[Page 6293]]

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Part II





Department of Veterans Affairs





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38 CFR Part 36



Loan Guaranty: Loan Servicing and Claims Procedures Modifications; 
Final Rule

Federal Register / Vol. 73, No. 22 / Friday, February 1, 2008 / Rules 
and Regulations

[[Page 6294]]


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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 36

RIN 2900-AL65


Loan Guaranty: Loan Servicing and Claims Procedures Modifications

AGENCY: Department of Veterans Affairs.

ACTION: Final rule.

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SUMMARY: This document establishes a new series for the Department of 
Veterans Affairs (VA) Loan Guaranty regulations, which will be phased 
in over an approximately eleven-month timeframe, as mortgage servicing 
industry segments ``go live'' on a new computer-based tracking system 
being established by VA. This new series replicates existing 
regulations for most aspects of the VA Loan Guaranty program, but also 
includes changes related to several aspects of the servicing and 
liquidating of guaranteed housing loans in default, and the submitting 
of guaranty claims by loan holders. Specific topics revised in the new 
4800 series include: increasing authority of servicers to implement 
loss-mitigation options, making incentive payments to servicers for 
successful loss-mitigation options, establishing a system of measuring 
and ranking servicer performance, establishing updated reporting 
requirements, permitting loan holders to review liquidation appraisals, 
requiring holders to calculate the net value of the security property 
prior to foreclosure, establishing a timeframe for when foreclosure of 
a defaulted loan should be completed, limiting the amount of interest 
and other fees and charges that may be included in a guaranty claim, 
establishing allowable attorneys fees to be included in the guaranty 
claim, establishing a deadline for the submission of guaranty claims, 
modifying the requirements for title evidence for properties conveyed 
to VA following foreclosure, modifying the requirements for how long a 
holder must maintain records relating to loans for which VA has paid a 
claim on the guaranty, and eliminating the requirement for the 
submission of legal procedural papers to VA. This document also 
includes specific revisions to three rules related to increased 
attorney fee allowances, establishment of a time limit for filing a 
claim under the guaranty, and granting authority for the Servicer 
Appraisal Processing Program that will be effective for all program 
participants upon publication of these rules.

DATES: This rule is effective February 1, 2008.

FOR FURTHER INFORMATION CONTACT: Mike Frueh, Assistant Director for 
Loan Management (261), Veterans Benefits Administration, Department of 
Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420, at 
202-461-9521. (This is not a toll-free telephone number.)

SUPPLEMENTARY INFORMATION:

Statutory Background

    Under 38 U.S.C. chapter 37, VA guarantees loans made by private 
lenders to veterans for the purchase, construction, and refinancing of 
homes owned and occupied by veterans.

Business Process Reengineering Review

    Beginning in 2001, VA conducted an internal, in-depth review of the 
entire Loan Administration process that was effectively a business 
process reengineering (BPR) effort. ``Loan Administration'' includes 
the servicing of existing loans, dealing with loans in default and 
loans being terminated, and the processing of claims by loan holders 
under the guaranty after defaulted loans have been foreclosed or 
otherwise terminated. Loan Administration also includes efforts by VA 
and private loan holders to assist homeowners whose loans are in 
default to cure the default, retain their home if possible, or find 
other means short of foreclosure. VA's BPR team recommended revising 
the Loan Administration process to reflect changes in the loan 
servicing industry in recent years, as well as advances in technology. 
VA's BPR team also recommended placing greater reliance on private 
sector servicing in accordance with VA guidelines, with VA using 
advanced technology to oversee servicing actions.

Regulatory Background

    On February 18, 2005 (70 FR 8472), VA proposed to amend its loan 
guaranty regulations in order to implement the following 
recommendations proposed by the BPR team: giving servicers increased 
authority to implement loss-mitigation alternatives to foreclosure and 
paying servicers an incentive bonus for each successful loss-mitigation 
alternative to foreclosure; establishing a performance-based tier-
ranking system for servicers; permitting qualified loan holders to 
review liquidation appraisals and establish the fair market value of 
the property; requiring loan holders to calculate the net value of 
properties securing loans prior to foreclosure; establishing timeframes 
for when VA would expect holders, exercising reasonable diligence, 
should be able to complete the foreclosure of defaulted loans; limiting 
the amount of interest and other fees and charges that may be included 
in a guaranty claim; establishing reasonable and customary attorney 
fees allowed to be claimed under the guaranty; establishing a deadline 
for holders to submit claims under the guaranty and to request 
reconsideration of denied claims; modifying the requirements for title 
evidence submitted to VA when the holder is conveying the property to 
VA following the liquidation sale; modifying the requirements for how 
long a holder must maintain records relating to loans for which VA has 
paid a claim on the guaranty; modifying the requirements for holders to 
report key events with regard to loans being serviced; and repealing 
the requirement for holders to provide VA with procedural papers in 
legal or equitable proceedings related to a loan on the security 
property. VA published a supplemental notice on November 27, 2006 (71 
FR 68498), to provide specific information regarding the computer-based 
system that VA proposed to implement as part of the loan servicing and 
claims procedure modifications. VA published another supplemental 
notice on June 1, 2007 (72 FR 30505), to provide information on a 
decision to phase-in implementation of most of the new rules, based on 
previous comments from the industry and the development of VA's 
computer-based tracking system.

Discussion of Public Comments

    The initial public comment period closed on April 19, 2005. VA 
received 51 comments from the public about various aspects of the 
proposed changes. The public comment period was reopened following 
publication of the first supplemental notice and closed December 11, 
2006. VA received an additional 8 comments from the public about the 
proposed reporting requirements for VA's new computer-based system. The 
public comment period was again reopened following publication of the 
second supplemental notice and closed June 15, 2007. VA received 2 
comments from the public about its proposed phased implementation and 
clarifications regarding modifications.
    The final rule has been revised to incorporate changes that VA 
agrees are necessary in light of, or as the logical outgrowth of, the 
comments provided. In order to accommodate the phased implementation of 
the new rules, VA is establishing a new subpart F (Sec. Sec.  36.4800 
through 36.4893, inclusive) of part 36 that contains substantive rules 
identical

[[Page 6295]]

to those in the current rules (Sec. Sec.  36.4300 through 36.4393). In 
addition, we redesignate those current rules as subpart B of title 38, 
CFR. Subpart F will be effective upon publication of this notice only 
for the first segment of the mortgage servicing industry, as described 
in the second supplemental notice published June 1, 2007 (72 FR 30505). 
The table below is similar to the one in that notice, and provides the 
effective date for the first segment that will be affected by these 
rules, as well as an indication of the time periods during which we 
expect to make these rules applicable to all other segments of the 
industry (although these time periods may change due to unforeseen 
circumstances). We will publish as notices in the Federal Register the 
actual applicability dates for industry segments two through nine.

------------------------------------------------------------------------
                                        Applicability date of phased-in
             Segment No.               rules (by calendar year quarter)
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1...................................  February 1, 2008.
2...................................  2nd Quarter, 2008.
3...................................  2nd Quarter, 2008.
4...................................  4th Quarter, 2008.
5...................................  2nd Quarter, 2008.
6...................................  3rd Quarter, 2008.
7...................................  3rd Quarter, 2008.
8...................................  3rd Quarter, 2008.
9...................................  4th Quarter, 2008.
------------------------------------------------------------------------

    Subpart B will continue to be the governing rules for industry 
segments until the dates they become subject to the new subpart F. VA 
is aware that certain portions of subpart B, specifically Sec. Sec.  
36.4302 and 36.4312, are in need of revision to match recent 
legislative amendments, as well as to update VA positions on certain 
requirements. However, in order to avoid confusion with those issues 
not directly impacting the servicing and liquidating of guaranteed 
housing loans in default, and the submitting of guaranty claims by loan 
holders, those changes have not been included in this rulemaking. 
Instead, VA is preparing proposed changes to Sec. Sec.  36.4302 and 
36.4312 in subpart B and in the corresponding Sec. Sec.  36.4802 and 
36.4813 in the new subpart F, and will request comments from the public 
on those changes after the effective date of these new rules.
    In our review of subpart B, we also identified a number of minor 
errors, such as erroneous cross-references, typographical errors, and 
hanging provisions (flush text) that needed reformatting, and have 
corrected these wherever necessary in the new subpart F. However such 
corrections have not affected the rights, responsibilities, or 
obligations of program participants.
    The following paragraphs discuss the comments VA received in 
response to the proposed rules and the supplemental notices. The 
paragraphs are in order by the new subpart F section number and provide 
VA responses. The preamble does not discuss sections about which we did 
not receive any public comment. The preamble also does not discuss any 
section that is substantively the same as its counterpart in Sec. Sec.  
36.4300 through 36.4393. However, such a section may contain conforming 
renumbering changes and/or technical revisions or reorganization. This 
final rule includes three changes to subpart B in Sec. Sec.  
36.4313(b)(5), 36.4321(d), and 36.4344a, and the comments and rationale 
for those changes are the same as those in the comments and responses 
on the new final rules in corresponding Sec. Sec.  36.4814(b)(5), 
36.4824(d), and 36.4848.

36.4800 Applicability of Sec. Sec.  36.4800 Through 36.4893, Inclusive

    Comment: VA should consider the time needed to adapt industry 
servicing systems and carefully test all aspects of the proposed 
electronic reporting requirements. This could also include special 
circumstances such as recent acquisitions, changes in servicing 
platforms, or other unforeseen situations.
    VA Response: VA has carefully considered the factors that are 
essential to the success of its new electronic reporting environment, 
and determined that a phased implementation by industry segment offers 
the best chance for success. Accordingly, VA has established nine 
industry segments for program participants, with each segment ``going 
live'' on VA's new computer-based tracking system over an approximately 
11-month timeframe. Each phase of implementation will include time for 
data clean-up, system modifications, defect corrections, testing of 
interfaces and data transmission, and review of lessons learned before 
initiating the next phase. Throughout this phase-in process, VA will 
remain flexible in adjusting its implementation schedule in order to 
accommodate participants' unique circumstances, such as changes in 
servicing platforms or unforeseen events. In addition, VA has the 
authority under Sec.  36.4838 to administratively offer relief to 
entities not meeting VA requirements, such as electronic reporting.

36.4801 Definitions

    Comments: VA should provide its definitions of ``repayment plans'' 
and ``special forbearances.''
    VA Response: When VA published the proposed rule to replace the 
existing Sec.  36.4317 with an arrangement to establish incentive 
payments for loss mitigation options, VA believed that the mortgage 
industry had a common understanding of the basic concepts of repayment 
plans and special forbearance agreements. However, while reviewing 
comments, and in researching definitions established by major industry 
participants (Fannie Mae, Freddie Mac, and the Department of Housing 
and Urban Development [HUD]), VA realized that each entity has its own 
slightly different definition for each of these terms. Accordingly, VA 
has added detailed definitions of ``repayment plan'' and ``special 
forbearance'' in this final rule in Sec.  36.4801 to avoid any 
confusion as to what is required for each of these types of loss 
mitigation actions. VA is also clarifying the role of the servicer by 
adding a definition to state that the servicer is the entity which will 
be assigned a tier ranking based on its performance and will receive 
any incentive payment on a loan it services for the loan holder. The 
definitions are only minor clarifications of basic concepts customary 
in the loan servicing industry and do not impose any new requirements 
or take away any substantive rights of program participants. VA has 
listed all of the loss mitigation options in Sec.  36.4819 in their 
preferred order of consideration (i.e., a hierarchy for review), but 
recognizes that individual circumstances may lead to ``out of the 
ordinary'' procedures. VA also plans to provide more detailed examples 
and advice on a number of issues, including repayment plans and special 
forbearances, as part of the training it will provide to servicers 
after publishing these rules.
    Comment: VA should clarify the payment of incentives for successful 
loss mitigation efforts.
    VA Response: VA concurs. The holder is the entity ultimately 
responsible for compliance with VA regulations and under Sec.  36.4801 
``Holder'' includes ``the authorized servicing agent of the lender or 
assignee or transferee.'' However, for purposes of tier ranking (Sec.  
36.4818) and loss mitigation options and incentives (Sec.  36.4819), 
VA's intent is to measure performance of the actual loan servicer and 
reward it accordingly. In order to make this distinction clearer, we 
provide a definition in Sec.  36.4801 of ``servicer.'' The authorized 
servicer is

[[Page 6296]]

either the servicing agent of a holder; or the holder itself, if the 
holder is performing all servicing functions on a loan. The servicer is 
typically the entity reporting all loan activity to VA and filing 
claims under the guaranty on behalf of the holder. VA will generally 
issue guaranty claims and other payments to the servicer, who will be 
responsible for forwarding funds to the holder in accordance with its 
servicing agreement. Incentives under Sec.  36.4819 will generally be 
paid directly to the servicer based on its performance under that 
section and in accordance with its tier ranking under Sec.  36.4818.
    Comment: VA should clarify the procedures and implications of debt 
reductions used to ensure a property is eligible for conveyance to VA.
    VA Response: In Sec.  36.4823, we clarify the procedures to be 
followed to reduce debts in order to gain the right to convey to VA 
properties acquired at liquidation sales. However, to avoid confusion 
with multiple definitions of similar terms, we do not use the terms 
``Indebtedness'', ``Specified amount'' and ``Unguaranteed portion of 
the indebtedness'' in this final rule in Sec.  36.4801; that section 
will instead use the term ``Total indebtedness.'' The terms are defined 
in Sec.  36.4301 because they are used primarily in Sec. Sec.  36.4320 
and 36.4321. However, the new final Sec. Sec.  36.4823 and 36.4824 do 
not contain them and refer only to the total indebtedness as defined in 
the statute and the new final Sec.  36.4801.
    The other definitions included in Sec.  36.4801 that are different 
from those in Sec.  36.4301 were previously proposed.

36.4809 Transfer of Title by Borrower or Maturity by Demand or 
Acceleration

    In Sec.  36.4308(g), we refer to a time period specified in Sec.  
36.4316, which in turn establishes a three-month waiting period prior 
to the filing of a notice of intention to foreclose. The reporting and 
processing of defaults is handled differently under the new rules in 
Sec. Sec.  36.4800 through 36.4893, and Sec.  36.4818 does not refer to 
a waiting period. Therefore, in Sec.  36.4809(g), we do not refer to 
another section but rather refer to the actual time frame of three 
months.

36.4814 Advances and Other Charges

    Comment: VA should review its proposed foreclosure attorney fee 
schedule, which is very similar to those published by HUD, Fannie Mae, 
and Freddie Mac in 2001, to account for reasonable increases in living 
costs over the past several years, as well as other cost increases 
since that time due to increased labor and operational expenses for 
attorneys.
    VA Response: VA concurs. VA has carefully reviewed the proposed 
foreclosure attorney fee schedule and has adjusted the amounts in 
accordance with the information provided in the comments, as well as 
updated information obtained from other sources. The table provided 
below, as referenced in final rules Sec.  36.4313(b)(5)(ii) and Sec.  
36.4814(b)(5)(ii), is reasonably consistent with the fees allowed by 
other agencies for comparable work, and the commitment in paragraph 
(b)(5)(ii) to review the schedule annually will ensure the opportunity 
to timely address any imbalance in the schedule. In addition, VA has 
slightly modified the proposed language in new final rules Sec.  
36.4313(b)(5)(iii) and Sec.  36.4814(b)(5)(iii) to allow additional 
trustee fees, above those allowed for legal services, when the trustee 
conducting the sale must be a Government official under local law, or 
if an individual other than the foreclosing attorney (or any employee 
of that attorney) is appointed as part of judicial proceedings, and 
local law also establishes the fees payable for the services of the 
public or judicially appointed trustee.
    VA intends to reimburse only for attorney fees for services related 
to foreclosure of loans. Most of the attorneys commenting on the 
proposed rule reported that over the past five years many servicers 
have been outsourcing the foreclosure oversight process (i.e., hiring 
third parties to perform functions previously handled as part of the 
servicer's routine duties), and firms providing such outsourcing 
services are charging attorney firms a fee for providing the file 
needed to initiate the foreclosure action. While VA understands that 
servicers may find efficiencies in outsourcing certain functions, the 
cost for such outsourcing must be considered as an operating expense of 
the firm contracting for the outsourcing; i.e., the servicer. VA cannot 
consider outsourcing fees to be part of the cost of an attorney fee for 
completing a foreclosure. Consistent with our proposed rule, VA is 
establishing maximum amounts for legal services in each State, and 
those amounts are intended to reimburse for reasonable attorney fees. 
This is consistent with the position taken by Freddie Mac, which 
prohibits payment for referral fees, packaging or other similar fees, 
and new case start-up fees in its Single Family Seller/Servicer Guide, 
Volume 2, Chapter 71, section 71.18. Fannie Mae also notes in its 2006 
Servicing Guide, Part VIII, Chapter 1, section 104.03, that it will not 
reimburse a servicer for legal fees and expenses related to actions 
that are essentially servicing functions.
    Comment: VA should allow a fee to cover the costs of restarting a 
foreclosure that has been postponed, for example, by the filing of a 
bankruptcy petition. This would be in addition to the reimbursement for 
obtaining relief from the bankruptcy stay.
    VA Response: VA concurs. VA recognizes that this is occurring more 
frequently, and is a true cost of doing business. Therefore, VA has 
allowed in the table provided herein in accordance with the final rules 
Sec.  36.4313(b)(5)(ii) and Sec.  36.4814(b)(5)(ii) an additional $350 
``foreclosure restart'' fee when a foreclosure sale is postponed or 
cancelled through no fault of the servicer or its foreclosure attorney. 
This includes but is not limited to bankruptcy, VA requested delay, 
property damage, hazardous conditions, condemnation, natural disaster, 
property seizure, or relief under the Servicemembers Civil Relief Act.
    Comment: VA should consider increasing its maximum allowable 
bankruptcy fees, for reasons similar to those suggested for foreclosure 
fees.
    VA Response: VA concurs. VA has reviewed the fees allowed by other 
entities, as well as the arguments made for increasing bankruptcy fees. 
VA believes that a modest adjustment is appropriate at this time and is 
revising the table referenced in the final rules in Sec.  
36.4313(b)(5)(ii) and Sec.  36.4814(b)(5)(ii) to allow attorney fees of 
$650 (Chapter 7) or $850 (initial Chapter 13) for obtaining bankruptcy 
releases directly related to loan termination. For additional relief 
filed under either chapter, VA will allow an additional $250. VA will 
continue to monitor these fees on an annual basis.
    The current legal services table is as follows:

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                                                                                                            Foreclosure
                      Jurisdiction                         Non-judicial      Judicial      Deed-in-lieu     restart fee     Chapter 13       Chapter 7
                                                            foreclosure     foreclosure   of foreclosure        \2\         release \3\     release \3\
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Alabama.................................................             550             N/A             350             350             850             650
Alaska..................................................            1200             N/A             350             350             850             650

[[Page 6297]]

 
Arizona.................................................             625             N/A             350             350             850             650
Arkansas................................................             750             N/A             350             350             850             650
California..............................................             600             N/A             350             350             850             650
Colorado................................................             800             N/A             350             350             850             650
Connecticut.............................................             N/A            1250             350             350             850             650
Delaware................................................             N/A             950             350             350             850             650
District of Columbia....................................             600             N/A             350             350             850             650
Florida.................................................             N/A            1200             350             350             850             650
Georgia.................................................             600             N/A             350             350             850             650
Guam....................................................            1200             N/A             350             350             850             650
Hawaii..................................................             N/A            1850             350             350             850             650
Idaho...................................................             600             N/A             350             350             850             650
Illinois................................................             N/A            1100             350             350             850             650
Indiana.................................................             N/A            1000             350             350             850             650
Iowa....................................................             550             850             350             350             850             650
Kansas..................................................             N/A             850             350             350             850             650
Kentucky................................................             N/A            1100             350             350             850             650
Louisiana...............................................             N/A             900             350             350             850             650
Maine...................................................             N/A            1250             350             350             850             650
Maryland................................................             800             N/A             350             350             850             650
Massachusetts...........................................             N/A            1250             350             350             850             650
Michigan................................................             650             N/A             350             350             850             650
Minnesota...............................................             650             N/A             350             350             850             650
Mississippi.............................................             550             N/A             350             350             850             650
Missouri................................................             650             N/A             350             350             850             650
Montana.................................................             600             N/A             350             350             850             650
Nebraska................................................             600             850             350             350             850             650
Nevada..................................................             600             N/A             350             350             850             650
New Hampshire...........................................             900             N/A             350             350             850             650
New Jersey..............................................             N/A            1300             350             350             850             650
New Mexico..............................................             N/A             900             350             350             850             650
New York--Western Counties \1\..........................             N/A            1250             350             350             850             650
New York--Eastern Counties..............................             N/A            1800             350             350             850             650
North Carolina..........................................             550             N/A             350             350             850             650
North Dakota............................................             N/A             900             350             350             850             650
Ohio....................................................             N/A            1100             350             350             850             650
Oklahoma................................................             N/A             900             350             350             850             650
Oregon..................................................             675             N/A             350             350             850             650
Pennsylvania............................................             N/A            1250             350             350             850             650
Puerto Rico.............................................             N/A            1100             350             350             850             650
Rhode Island............................................             900             N/A             350             350             850             650
South Carolina..........................................             N/A             850             350             350             850             650
South Dakota............................................             650             850             350             350             850             650
Tennessee...............................................             550             N/A             350             350             850             650
Texas...................................................             550             N/A             350             350             850             650
Utah....................................................             600             N/A             350             350             850             650
Vermont.................................................             N/A             950             350             350             850             650
Virginia................................................             600             N/A             350             350             850             650
Virgin Islands..........................................             N/A            1100             350             350             850             650
Washington..............................................             675             N/A             350             350             850             650
West Virginia...........................................             550             N/A             350             350             850             650
Wisconsin...............................................             N/A            1100             350             350             850             650
Wyoming.................................................             600             N/A             350             350             850             650
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\1\ Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe, Niagara, Ontario, Orleans, Steuben, Wayne,
  Wyoming, and Yates. The remaining counties are in Eastern New York.
\2\ When a foreclosure is stopped due to circumstances beyond control of the holder or its attorney (including, but not limited to bankruptcy, VA-
  requested delay, property damage, hazardous conditions, condemnation, natural disaster, property seizure, or relief under the Servicemembers Civil
  Relief Act) and then restarted, VA will allow the restart fee in addition to the base foreclosure attorney fee.
\3\ For each additional relief of stay under either chapter, VA will pay $250.

    Comment: VA should publish a single national reimbursable fee 
schedule so that servicers will be able to accurately calculate total 
indebtedness. VA should provide at least 30 days advance notice of 
changes in fees to allow for system updates and procedural 
modifications.
    VA Response: VA does not concur at this time because this 
information is maintained at the Regional Loan Center (RLC) level in 
order to be updated as quickly as possible when local changes occur, so 
that holders may be reimbursed for actual expenses as they occur, 
rather than experiencing a lag time. The current schedules provide the 
local fees and expenses and we believe that this data should continue 
to be provided at the local level. However, VA will initiate plans to 
post such a national schedule of fees when this can be accomplished in 
a timely manner.

36.4815 Loan Modifications

    Comment: VA should not require holders to reduce the interest rate 
on a loan modification where market interest rates have decreased since 
the date of loan origination.

[[Page 6298]]

    VA Response: VA does not concur, but is changing the new final rule 
in Sec.  36.4815 in an effort to make it easier for servicers to 
administer. The existing VA regulation dealing with loan modifications 
(Sec.  36.4314) allows no change to the interest rate on the loan. In 
fact, another regulation (Sec.  36.4311(c)) specifically states that 
interest in excess of the rate reported by the lender when requesting 
evidence of guaranty shall not be payable. The vast majority of VA-
guaranteed loans are securitized in GNMA (Government National Mortgage 
Association) insured pools, which require the holder to purchase the 
loan from the pool in order to modify the loan. The proposed change 
recognized the difficulty faced by loan servicers in attempting to 
resecuritize loans with interest rates well below the market average, 
and thus allowed for increasing interest rates on modifications when 
market conditions dictate. However, VA also believes it is only fair to 
veterans to similarly reduce interest rates when market rates have 
decreased since loan origination. The impact of reduced interest rates 
would be similar to the effect of other creditworthy borrowers 
refinancing at lower interest rates, and should not adversely affect VA 
lenders. Therefore, VA is not departing from requiring an interest rate 
reduction where market interest rates have decreased since loan 
origination. VA is, however, removing the one percent cap on interest 
rate increases that had been contained in the proposed rule so that 
modifications will become a more widely used tool to help veterans 
retain their homes. VA is also slightly modifying the language that had 
been in paragraph (c) of the proposed rule in Sec.  36.4314 to make 
adjustments easier, by allowing the maximum interest rate to be based 
on a month-end rate, rather than requiring a daily adjustment as the 
proposed rule had provided. Therefore, Sec.  36.4812(c) is changed to 
allow a higher interest rate on a modified loan. The final rule in 
Sec.  36.4815 is changed as described above to remove the one percent 
cap on increases and to clarify the date to be used in establishing the 
new maximum interest rate allowable on a modified loan.
    Comment: VA should increase the guaranty on a modified loan to 
match the percentage guaranteed at loan origination, rather than only 
allowing an increase in the amount of guaranty if it would otherwise 
provide less than 25% guaranty of the modified loan amount.
    VA Response: VA does not concur. The proposal in Sec.  36.4314(g) 
to increase the guaranty on a modified loan to 25% of the loan amount 
was another effort to help modified VA-guaranteed loans qualify for 
resecuritization. Under the existing Sec.  36.4314, the amount of the 
guaranty does not increase upon loan modification, which means that the 
percentage of guaranty, in effect, will decrease if the modified loan 
amount is greater than the original loan amount. This is important 
because all VA-guaranteed loans greater than $144,000 at origination 
have a maximum 25% guaranty, and the average new loan is often well 
above that amount. Under the existing Sec.  36.4314 any such loan being 
modified would retain the same amount of guaranty, and thus have an 
effective percentage of guaranty less than 25% whenever the modified 
loan amount is greater than the original loan amount. This final rule 
in Sec.  36.4815(h) (due to minor realignment of the section 
paragraphs) allows the guaranty amount on the modified loan to increase 
up to 25% of the modified loan amount, subject to the maximum amount of 
guaranty allowable under the law. This should be sufficient to allow 
repooling in a new GNMA-insured security, and provide adequate risk 
sharing for the modified loan among VA, the holder, and GNMA. 
Therefore, no further revision is necessary, other than conforming 
language in Sec. Sec.  36.4802(h) and 36.4824(a).
    Comment: VA should not require the same underwriting standards for 
loan modifications as those used at loan origination.
    VA Response: VA does not concur. VA's existing Sec.  36.4314(a) 
governing loan modifications requires that the holder determine that 
the borrower is a satisfactory credit risk, and the proposed rule did 
the same by referencing the criteria in Sec.  36.4337. In establishing 
that the veteran is a satisfactory credit risk, there must be an 
analysis of the veteran's income and obligations, as well as a review 
of the credit history. The proposed rule specifically addressed the 
issue of credit history with respect to the event(s) that led to the 
need for loan modification, and the criteria in Sec.  36.4337 provide 
for the acknowledgement of compensating factors to address issues that 
might otherwise preclude the extension of credit. VA therefore believes 
the proposed regulation was sufficiently flexible to accommodate the 
assessment of the creditworthiness of borrowers who seek to modify 
their loans, and no changes are necessary in the final Sec.  
36.4815(a). A specific comment requested that the use of ``in-file'' 
credit reports be allowed to reduce costs, and VA agrees this will be 
in accordance with the way its underwriting criteria have been 
interpreted in order to expedite processing.
    Comment: VA should make provision for other expenses of 
modification not being rolled into the new loan.
    VA Response: VA concurs. The existing Sec.  36.4314 makes no 
provision for inclusion of any expenses in the modified loan amount. 
The proposed rule provided that only certain items could be included in 
the modified indebtedness. VA carefully reviewed the comments on this 
subject and is clarifying Sec.  36.4815(e) so that it addresses all 
possible expenses of modification. In addition to allowing holders to 
include unpaid principal, accrued interest, and deficits in the taxes 
and insurance impound accounts in the modified indebtedness, holders 
will also be allowed to capitalize advances required to preserve their 
lien position, such as homeowner association fees, special assessments, 
water and sewer liens, etc. By limiting the items that may be included 
in the modified loan indebtedness, VA is attempting to protect both the 
interests of the Government and the veteran borrower by keeping the 
potential loan-to-value (LTV) ratio as low as possible, while 
recognizing that it may often exceed 100%. In a case where modification 
is determined to be the best alternative early in the course of a 
default, there will be little else in the way of other fees and 
expenses that need to be paid. In such a case the borrower should be 
able to handle those other costs as a demonstration of 
creditworthiness, and after including the expenses allowed by the new 
final rule in the modified loan amount, the resulting LTV ratio may not 
be significantly different than at loan origination. If a default has 
continued for quite some time before modification is deemed feasible, 
then it is likely that the additional fees and costs may have accrued 
to a sum equal to one or more monthly mortgage payments. VA never 
envisioned that such fees and costs would be forgiven by the loan 
holder. Because the modification process involves some period when 
regular payments are not made on the loan, the borrower should be able 
to accumulate funds to cover the fees and costs accrued during the 
default, rather than having them rolled into the modified loan 
indebtedness. This is similar to the HUD requirements for 
modifications. As for any costs associated with processing the 
modification, VA expects that the incentives paid for successful 
modifications will offset such expenses, and VA will not allow any 
processing costs to be charged to the borrower as stated in the final 
Sec.  36.4815(f).
    Comment: VA should not require that all current owners occupy the 
property

[[Page 6299]]

and should pay for a title insurance policy covering the modified loan.
    VA Response: VA agrees that occupancy should not be a requirement 
because the basic program requirements do not require continued 
occupancy in order for the guaranty to remain in effect (i.e., at some 
point a veteran borrower may move from the home securing the VA-
guaranteed loan, but that does not invalidate the guaranty). Hence, 
Sec.  36.4815(a) will not require that all current owners occupy the 
property.
    As for title insurance policies, existing VA regulation Sec.  
36.4828(b) does require that holders obtain and retain a lien of proper 
dignity against the security property, and title insurance is often 
used at loan origination to satisfy this requirement. If a holder 
decides to require title insurance in connection with a loan 
modification to ensure its lien status, then VA would not object to a 
reasonable expense to the buyer for this service. Since in most cases a 
title insurance policy was obtained at loan origination, any insurance 
obtained at modification would only need to cover the period from loan 
origination to the date of modification, and it is expected that the 
cost for a title endorsement, or other form of insurance ``update,'' 
would be considerably less than the amount paid at loan origination. 
The final rule in Sec.  36.4815(f) slightly revises the proposed rule 
to provide this clarification.
    Comment: VA should not require that all current owners agree to the 
modification.
    VA Response: VA does not concur. VA is retaining the provision in 
the new final rule in Sec.  36.4815(a)(5) that all current owners must 
be obligated on the loan and participate in any modification, because 
it would not be fair to allow a change in the terms of a loan secured 
by a property without first notifying all parties with an ownership 
interest in that property and obtaining their agreement to the change. 
If a holder encounters unusual circumstances that lead it to believe a 
modification not meeting the requirements in Sec.  36.4815(a)(1)-(6) 
would be beneficial to a veteran, then the case may be submitted to VA 
for prior approval.
    Comment: VA should not restrict the number of times that a loan may 
be modified because other agencies/investors have no such limits.
    VA Response: Under Sec.  36.4314, we permit three modifications to 
any one loan without prior VA approval, but also may allow unlimited 
modifications with prior VA approval. To that extent, we agree with the 
comment.
    However, to the extent that the comment requests unlimited 
modifications without VA review, VA does not concur because VA has a 
responsibility to ensure that loan modifications are fair to the 
borrower, and to protect the interests of the Government. The final 
rule in Sec.  36.4815 provides sufficient flexibility to address almost 
all situations that may arise. Although the rule cannot address every 
possible circumstance, it does adequately provide for loss mitigation 
by authorizing holders in advance to modify the vast majority of loans, 
while allowing holders to seek direct approval from VA for unusual 
cases that do not fit the general criteria described in the regulation.
    In order to avoid any misunderstandings about the authorizations 
granted, the final rule is modified by adding paragraph (j), which 
advises that the authority contained in Sec.  36.4815 does not create a 
right of a borrower to have a loan modified but simply authorizes the 
loan holder to modify a loan in certain situations without the prior 
approval of the Secretary. This is in keeping with past VA policy and 
court decisions over the years that have found that VA's refunding 
program (Sec.  36.4820) is not a veteran's benefit, but rather an 
administrative option established by the regulation to enable VA to 
assist a veteran when VA makes the determination that the option is 
appropriate.
    Comment: VA should include the words ``or default is imminent'' in 
Sec.  36. 4815(a)(1).
    VA Response: VA does not concur. The proposed rule in Sec.  
36.4314(a) included those words and the second supplemental notice 
proposed deleting them. As stated in the second supplemental notice, 
because VA is proposing a hierarchy of loss mitigation options for 
consideration within the new regulatory package, it would not be 
appropriate for a holder to consider modification of a loan until after 
first considering a repayment plan or a period of forbearance in order 
to allow loan reinstatement. Therefore, it would not normally be 
feasible for a holder to consider modification of a loan where default 
is only imminent, because that would not allow for prior consideration 
of a repayment plan or a period of forbearance. However, if an unusual 
circumstance arises, a holder may seek direct approval from VA for 
approval of a case that does not fit the general criteria. Therefore, 
the final rule in Sec.  36.4815(a)(1) will remain as proposed in the 
second supplemental notice.

36.4817 Servicer Reporting Requirements

    Comment: VA should review its need for the requested data, should 
reduce the number of reportable items, and should eliminate the 
expedited, event-specific reporting.
    VA Response: VA concurs for the most part. VA has carefully 
reviewed the report timing and the required items in the proposed rule 
in Sec.  36.4315a in light of industry comments, consultation with 
information technology specialists, and review of the goals and 
operating procedures in VA's new loan servicing environment, as well as 
the reporting requirements of HUD, Fannie Mae, and Freddie Mac. In 
conducting this review, VA identified and retained only those items for 
reporting that VA determined absolutely necessary to conduct proper 
oversight of servicer actions. That oversight must include review of 
servicer actions that are being newly delegated by VA, servicer actions 
that were previously reviewed by VA utilizing extensive paper reports 
provided by servicers, and servicer actions that in the past were 
reviewed only upon submission of various documentation from servicers. 
Providing this information electronically should greatly reduce the 
time required for interaction between VA and servicers via telephone 
and written communications that occurs under the present operating 
procedures. VA has determined that a number of items (including escrow 
disbursements and legal actions other than terminations) will not be 
included in the list of what must be reported to VA. We discuss these 
items later in this document, responding to specific comments. In 
addition, remaining items for loans not in default may all be reported 
on a monthly basis (i.e., no later than the seventh calendar day of the 
month following the month in which the event occurred), while most of 
the items related to loan defaults will also be required on a monthly 
basis, rather than within five business days of an event. VA is 
changing these events and most of the remaining events that must be 
reported expeditiously to require reporting within 7 calendar days, 
rather than 5 business days because most tracking systems are not 
equipped to calculate business days, but can easily handle computation 
of calendar days.
    As suggested by the comments, one item previously proposed to be 
reported on all loans, bankruptcy filing information, will only be 
required on loans reported in default. Only events denoting significant 
action on loans

[[Page 6300]]

reported in default (such as referral to an attorney to initiate 
foreclosure, establishment of a liquidation sale date, advice that a 
sale has been held, etc.) will still need to be reported within seven 
calendar days of the event. As in the past, holders will need to notify 
VA within 15 calendar days of a liquidation sale when they desire to 
convey a property to VA.
    An example of one item that was in the proposed rule Sec.  
36.4315a(c)(2) with a five business day reporting requirement was 
information on assumption of a VA-guaranteed loan. Existing rule Sec.  
36.4303 presently requires reporting of information on approved 
assumptions and unauthorized transfers of ownership. The first 
supplemental notice, which provided more detail on the specific events 
to be reported, required electronic reporting of transfer of ownership 
(i.e., an authorized assumption) and unauthorized transfer of 
ownership. In light of the comments, VA is not, under Sec.  36.4817(c), 
requiring electronic reporting of unauthorized transfer of ownership, 
but is requiring electronic reporting of authorized transfer of 
ownership, which will be renamed accordingly. The final rule in Sec.  
36.4803(l)(2) continues to require the holder to notify VA within 60 
days of learning of an unauthorized transfer, as in the existing Sec.  
36.4303(l)(2).
    Comment: Information on the Servicemembers Civil Relief Act should 
only be required if that is a reason for delay of a foreclosure sale.
    VA Response: VA concurs with deleting the requirement to report 
this event. If the event causes delay in loan termination, then 
information about it may be reported as part of the claim event 
reporting.
    Comment: VA should allow reporting of multiple events occurring on 
a single loan during a monthly reporting period.
    VA Response: VA agrees with this comment and the file reporting 
format will allow for multiple events to be reported on each loan.
    Comment: The requirement to report substantial equity (25% or more) 
will necessitate a special title search and should be deleted, as it 
could require servicers to upgrade their systems to load junior lien 
information and to calculate the equity.
    VA Response: VA concurs with deleting this requirement. VA proposed 
this requirement in Sec.  36.4315a(f) in order to ensure review of 
cases where substantial equity could exist. However, after reviewing 
the other data requested and the computing capabilities offered by its 
new computer system, VA decided it can instead use the other reported 
data to calculate its own estimate of equity and take appropriate 
action to ensure that veterans receive every reasonable opportunity to 
salvage that equity prior to loss through foreclosure. Therefore, there 
is no requirement in the final rule to calculate or report substantial 
equity.
    Comment: VA should consider using the HUD Single Family Default 
Monitoring System (SFDMS) file layout for reporting information, rather 
than requesting data that may not presently be available in many loan 
servicing systems.
    VA Response: VA considered this possibility, but decided it was not 
feasible. As VA began developing the computer system that it will use 
to receive data from servicers, VA obtained considerable information 
about HUD's file layout and other systems from a leading provider of 
loan accounting and default tracking services, which is subcontracted 
to the contractor developing VA's system. As that development 
continued, it was clear that the information VA needs to monitor 
servicer activities that have been delegated will require more details 
than those obtained by HUD's SFDMS. This is due to different processes 
used by the agencies in conducting oversight, as well as making 
payments for incentives, acquisitions, and claims. VA has found that 
almost all of the data fields it is still seeking presently exist in 
most servicing systems. VA worked collaboratively with the providers of 
the most widely utilized loan servicing systems, and continued to 
reduce its data requirements as much as possible, in order to develop 
the easiest file layout and method of transmission for reporting. That 
layout has been posted on VA's public Web site. Therefore, VA expects 
that the industry will be able to easily comply with its remaining 
reporting requirements in Sec.  36.4817.
    Comment: VA should consider the potential cost to servicers of the 
additional reporting requirements, the time needed to implement those 
changes, and the security risks of transmitting additional information.
    VA Response: VA has carefully considered all of those issues in 
developing its final reporting rule in Sec.  36.4817.
    VA recognizes that few changes can be made without some costs. 
However, by using a fixed width flat file layout, VA is utilizing the 
simplest format currently available for reporting data. Moreover, VA 
has developed a methodology to reduce the amount of computations 
required by most loan servicing platforms when extracting data from 
their systems to report events to VA. This should also significantly 
reduce the cost of changes. There will be a few additional data fields 
that most servicing systems will need to add over time, and VA realizes 
that there will be some expenses to accomplish this, but the result 
will be data that is available electronically rather than manually.
    While there may be some programming costs incurred by servicers due 
to the additional reporting requirements in Sec.  36.4817, VA expects 
that servicers will benefit in a number of ways. First, with the change 
to electronic reporting, servicers will greatly reduce their monthly 
expenses of reporting defaults and loan status updates via paper forms 
to VA, as well as reducing the time required by their employees to 
respond to written and telephone inquiries from VA. Second, the 
additional data required is for purposes of VA oversight, but that data 
should be of considerable value to servicers in tracking their internal 
servicing performance (for example, providing greater control over 
insoluble defaults and ensuring faster referral for termination, 
allowing closer review of payment plans to monitor performance, etc.). 
Third, having the data available electronically should eliminate many 
manual processes that are much more costly. VA expects there will be 
many more areas in which servicers will benefit from the availability 
of this new data.
    VA is well aware that considerable lead time is needed in order to 
change loan servicing systems to capture additional data. VA has worked 
with its contractor and subcontractor to develop a phased approach to 
implementation of its new, computer-based tracking system, the VA Loan 
Electronic Reporting Interface (VALERI). VA will implement VALERI over 
an approximately 11-month timeframe, with program participants grouped 
into nine segments that will ``go live'' on VA's new system during 
designated phases of implementation. Each phase of implementation will 
incorporate time for data clean-up, system modifications, defect 
corrections, testing of interfaces and data transmission, and review of 
lessons learned before initiating the next phase. VA is also developing 
a Web portal to allow manual input of information that is not yet 
contained in major loan servicing systems, and for smaller servicers 
who may not utilize servicing system providers, although the ultimate 
goal is automated file transfers of all information.
    Data security is of the utmost importance to VA. Servicer 
suggestions to delete requests for sensitive information, such as 
Social Security

[[Page 6301]]

Numbers (SSNs), have been honored as much as possible. VA will not 
request SSNs as part of the basic monthly reporting as originally 
proposed. Instead, the only request for SSNs will be when servicers 
report them for new loan assumers. Those SSNs and all other data will 
be encrypted during transmission, appropriate protocols will be 
established with each servicer and its loan servicing system (or 
provider) to ensure secure transmissions, and access to the data at VA 
and its contractors will be limited to authorized users.

36.4818 Servicer Tier Rankings--Temporary Procedures

    Comment: In developing its tier rankings, VA should consider a 
methodology that is publicly disseminated and can easily be determined 
by servicers based on information available to them. VA should also 
incorporate some allowance for the purchase of delinquent loans from 
other servicers.
    VA Response: VA concurs to an extent. In our development of a 
proposed rule to implement the tier ranking system, we will consider 
the negative impact of the purchase of delinquent loans from other 
servicers. In the preamble to this proposed rule, VA indicated an 
intent to model its tier ranking system after that used by the Federal 
Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac. 
After VA has collected data under its new reporting requirements for 
six months, VA intends to review the data and develop the criteria for 
ranking servicers. Those criteria will then be published in the Federal 
Register for notice and comment. Whether the final rule that implements 
the tier ranking system is similar to the Freddie Mac model will depend 
upon the data we collect and the comments we receive. VA expects that 
the computer system for collecting data will be operational in 2008, 
and proposed rules for tier ranking will be published in calendar year 
2009. Accordingly, the final rule in Sec.  36.4818 remains as proposed.
    Comment: VA should consider paying incentives at higher than the 
Tier II ranking during the first year, either due to some assessment of 
higher performance, or else based on a servicer's participation in VA's 
current Server Loss Mitigation Program (SLMP).
    VA Response: VA does not concur. The proposed rule Sec.  36.4316(a) 
provided for four levels of tier rankings of servicers, with all 
servicers in Tier II for the initial ranking period as of the effective 
date of this rule. Because VA will have no published methodology for 
rating servicer performance during the first year of the new program, 
it would not be fair to attempt to determine which servicers should be 
paid at the Tier I or any other level, other than the initial Tier II 
rating for all servicers. While VA has had the SLMP in operation for 
many years, that program has not attempted to measure specific 
performance in a manner similar to the proposed Servicer Tier Ranking 
system, and the SLMP has only allowed two loss mitigation alternatives, 
and not the three home retention alternatives in the new program. 
Accordingly, it would not be fair to grant SLMP participants a higher 
tier ranking until the criteria for performance have been established. 
In any event, the proposed incentive payments for Tier II compare 
favorably to what VA allowed under SLMP, and have been adjusted 
slightly to account for the time elapsed since the initial publication 
of the proposed amounts, as well as changes by other agencies during 
that time. Therefore, the final rule in Sec.  36.4818 remains as 
proposed.

36.4819 Servicer Loss Mitigation Options and Incentives

    Comment: VA should simply adopt HUD (Department of Housing and 
Urban Development) loss mitigation procedures, fees, and reimbursement 
schedules, including incentive payment upon execution of a repayment 
plan, rather than waiting for final or partial completion of the plan 
to pay for the additional work required in analyzing data and 
establishing a plan.
    VA Response: VA does not concur. VA carefully considered loss 
mitigation programs developed by HUD, Fannie Mae, Freddie Mac, and 
private mortgage insurers as part of its BPR project. Although most had 
attractive features, no one program by itself addressed all the issues 
of loss mitigation in the manner VA felt was necessary to ensure proper 
assistance to veterans, while also rewarding loan servicers in an 
appropriate fashion for success in mitigating potential losses.
    As for the comment suggesting that incentives be paid upon 
execution of a repayment plan or special forbearance agreement because 
of the work involved in developing the plan, VA believes this is part 
of the normal activity of servicing a delinquent loan in order to 
determine whether it may be reinstated or whether the default is 
insoluble. While one comment was that loss mitigation efforts have 
historically been considered extraordinary servicing activity, VA 
believes that any servicer interested in properly managing its 
portfolio (and ensuring future servicing income) will exert reasonable 
efforts to obtain borrower financial information to determine the 
likelihood of loan reinstatement. Therefore, the incentives authorized 
under this section are in recognition of basic concepts customary in 
the loan servicing industry, and do not impose any new requirements or 
take away any substantive rights of program participants. However, 
paying an incentive simply for executing a repayment or forbearance 
agreement would not serve as a true incentive for developing a plan 
that is likely to succeed, but could instead encourage plans where 
success is improbable. Therefore, VA will not revise its program to 
make an incentive payable upon execution of a loss-mitigation 
alternative and the new final rules in Sec. Sec.  36.4819 and 
36.4822(e) and (f) (adjusted from (f) and (g)) remain generally as 
proposed. In order to clarify VA's intended use of the options and 
alternatives, they are listed in Sec.  36.4819(b) from top to bottom in 
their preferred order of consideration (i.e., a hierarchy for review), 
but VA recognizes that individual circumstances may occasionally lead 
to ``out of the ordinary'' considerations.
    Comment: VA should provide a partial claim loss mitigation benefit 
similar to that offered by HUD.
    VA Response: VA does not concur. Under the HUD Partial Claim 
option, a mortgagee will advance funds on behalf of a mortgagor in an 
amount necessary to reinstate a delinquent loan (not to exceed the 
equivalent of 12 months PITI). The mortgagor will execute a promissory 
note and subordinate mortgage payable to HUD. Currently, these 
promissory or ``Partial Claim'' notes assess no interest and are not 
due and payable until the mortgagor either pays off the first mortgage 
or no longer owns the property.
    The issue of a similar VA partial claim program has been discussed 
for many years within Congress and at VA. However, Congress has not 
specifically authorized VA to develop such a program. As explained 
above, partial claim payments are actually payments on behalf of 
homeowners to their loan holders, but VA has no authorization to make 
direct loans to borrowers to cover their delinquent payments, so a 
partial claim program is not feasible. Instead, VA believes that by 
encouraging holders to consider extended repayment plans or even loan 
modifications, borrowers should receive the assistance necessary to 
retain ownership of their homes. Therefore, VA does not concur that a 
partial claim program should be instituted in the new final rule in 
Sec.  36.4819.

[[Page 6302]]

36.4820 Refunding of Loans in Default

    Comment: VA should establish a process to extend the deadline to 
allow for recording of documents.
    VA Response: VA does not concur. VA proposed in Sec.  36.4318(c) to 
establish a deadline for submission of title documents on refunded 
loans, and to allow VA to impose a penalty for continued failure to 
comply with that deadline. VA must retain the option to take 
appropriate action when a holder has demonstrated a continued pattern 
of non-compliance with VA requests for timely delivery of documents 
that should be readily available, given the routine nature of loan 
transfers within the industry. VA has slightly modified the language to 
clarify that in accordance with the general rule, as applied throughout 
VA's regulations, notice to VA is deemed to be effective as of the date 
that VA receives such notice; notice from VA to others is deemed 
effective as of the date that VA sends or transmits such notice. If a 
holder encounters an occasional delay due to failure by a former 
servicer to adequately document a servicing transfer, for example, then 
VA does not expect to take the action authorized by the proposed rule 
in Sec.  36.4318(c). On the other hand, if a servicer routinely fails 
to properly perform its duties on behalf of the holder and consistently 
fails to timely provide documents that should be readily available, and 
if the servicer fails to correct its practices after VA provides 
notice, then the final rule in Sec.  36.4820(c) enables VA to focus the 
attention of the servicer to its problems by temporarily withholding 
all payments until the specific deficiencies cited by VA have been 
resolved. Therefore, the ``process'' proposed by the comment is not 
necessary and the final rule in Sec.  36.4820 remains as proposed.
    Comment: VA should make the title document requirements for 
refunding conform to the liquidation title package requirements.
    VA Response: VA does not concur. The proposed rule Sec.  36.4318 
required provision of all legal documents required to evidence proper 
loan transfer. Refunding of a loan is simply an assignment, rather than 
a liquidation, and therefore does not involve documents establishing 
ownership of a property. Accordingly, the title document requirements 
for refunding review and conveyance of properties must be different. 
The final rule Sec.  36.4820(c) remains as proposed.

36.4821 Service of Process

    Comment: VA should define ``procedural papers'' in more detail--for 
example, does this include pleadings, claim back up, etc.?
    VA Response: VA does not concur. The existing rule Sec.  36.4319(a) 
requires that all ``procedural papers'' be provided to VA whenever a 
loan holder institutes suit or otherwise becomes a party in any legal 
or equitable proceeding brought on or in connection with the guaranteed 
or insured loan indebtedness, or involving title to, or other lien on, 
the security. The final rule Sec.  36.4821(a) requires only that VA and 
the United States Attorney be provided with process when the Secretary 
of Veterans Affairs is actually named as a party to a legal action, 
which is effectively the definition of ``procedural papers'' that must 
be delivered to VA. VA has no specific requirement for the retention of 
pleadings or other actions in the normal course of a loan termination, 
although the final rule in Sec.  36.4833 requires the holder to 
maintain a record of the amounts received on the obligation and 
disbursements chargeable thereto and the dates thereof, including 
copies of bills and receipts for such disbursements. This is the type 
of ``claim backup'' referenced in Sec.  36.4824(d)(5), which provides 
that supporting documents will not be submitted with the claim under 
guaranty, but are subject to inspection as provided in Sec.  36.4833. 
The final rule Sec.  36.4821 remains as proposed.

36.4822 Loan Termination

    Comment: VA should adjust the timeframes for foreclosure and also 
establish automatic extensions for many different types of delays.
    VA Response: VA has reviewed all of the individual State timeframes 
for foreclosure in the proposed rule Sec.  36.4319a(a), has taken into 
consideration the specific information provided in the comments on the 
processes, and is adjusting the timeframes in the final rule. In 
addition, VA is slightly revising the final Sec.  36.4814(f)(2) and 
Sec.  36.4824(a)(3)(ii), which describe the calculation of the maximum 
interest payable on a foreclosure, so that the calculation of the date 
to which interest will be paid shall include 210 calendar days from the 
due date of the last paid installment, in addition to the State 
calendar day timeframe for foreclosure. This is in response to comments 
requesting additional time for loss mitigation efforts. It equates to 
the present guideline used by VA in establishing interest cutoffs, in 
that it allows 180 days from the date of last paid installment (which 
is typically the time that VA requests initiation to terminate a loan), 
plus 30 days (which reflects the time allowed for initiation of such 
action under the existing Sec.  36.4319(f)), plus the actual time to 
complete foreclosure. The timeframes will be reviewed as appropriate 
and changes published in the Federal Register, and maintained 
throughout the year on a Web site under VA's control, such as at http://www.homeloans.va.gov. The timeframes have been revised to reflect that 
the timeframes are in calendar days. The timeframes effective as of the 
date of this rule are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                    Time frame
              Jurisdiction                         Procedure                  Final event            (calendar
                                                                                                       days)
----------------------------------------------------------------------------------------------------------------
Alabama.................................  Non-Judicial..............  Sale......................              60
Alaska..................................  Non-Judicial..............  Sale......................             120
Arizona.................................  Non-Judicial..............  Sale......................             120
Arkansas................................  Non-Judicial..............  Sale......................              90
California..............................  Non-Judicial..............  Sale......................             150
Colorado................................  Non-Judicial..............  Sale......................             150
Connecticut.............................  Judicial..................  Sale (Vesting Date).......             180
Delaware................................  Judicial..................  Confirmation/Ratification.             240
District of Columbia....................  Non-Judicial..............  Sale......................              60
Florida.................................  Judicial..................  Confirmation/Ratification.             150
Georgia.................................  Non-Judicial..............  Sale......................              90
Guam....................................  Non-Judicial..............  Sale......................             180
Hawaii..................................  Judicial..................  Confirmation..............             240
Idaho...................................  Non-Judicial..............  Sale......................             180

[[Page 6303]]

 
Illinois................................  Judicial..................  Sale......................             300
Indiana.................................  Judicial..................  Sale......................             270
Iowa....................................  Judicial..................  Sale......................             180
                                          Non-Judicial..............  Sale (Filing of Affidavit)              60
Kansas..................................  Judicial..................  Sale......................             150
Kentucky................................  Judicial..................  Confirmation..............             150
Louisiana...............................  Judicial..................  Sale......................             180
Maine...................................  Judicial..................  Sale......................             300
Maryland................................  Non-Judicial..............  Ratification Date.........              90
Massachusetts...........................  Judicial Order............  Sale......................             180
Michigan................................  Non-Judicial..............  Sale......................              90
Minnesota...............................  Non-Judicial..............  Sale......................              90
Mississippi.............................  Non-Judicial..............  Sale......................              90
Missouri................................  Non-Judicial..............  Sale......................              60
Montana.................................  Non-Judicial..............  Sale......................             150
Nebraska................................  Judicial..................  Confirmation..............             180
                                          Non-Judicial..............  Sale......................             120
Nevada..................................  Non-Judicial..............  Sale......................             150
New Hampshire...........................  Non-Judicial..............  Sale......................              90
New Jersey..............................  Judicial..................  Sale......................             300
New Mexico..............................  Judicial..................  Confirmation..............             180
New York--Western Counties \1\..........  Judicial..................  Sale......................             240
New York--Eastern Counties..............  Judicial..................  Sale......................             270
North Carolina..........................  Non-Judicial..............  Sale......................             120
North Dakota............................  Judicial..................  Sale......................             240
Ohio....................................  Judicial..................  Confirmation..............             360
Oklahoma................................  Judicial..................  Confirmation..............             210
Oregon..................................  Non-Judicial..............  Sale......................             150
Pennsylvania............................  Judicial..................  Sale......................             270
Puerto Rico.............................  Judicial..................  Confirmation..............             450
Rhode Island............................  Non-Judicial..............  Sale......................              90
South Carolina..........................  Judicial..................  Sale......................             180
South Dakota............................  Judicial..................  Sale......................             150
                                          Non-Judicial..............  Sale......................              90
Tennessee...............................  Non-Judicial..............  Sale......................              60
Texas...................................  Non-Judicial..............  Sale......................              90
Utah....................................  Non-Judicial..............  Sale......................             150
Vermont.................................  Judicial..................  Sale......................             300
Virginia................................  Non-Judicial..............  Sale......................              60
Virgin Islands..........................  Judicial..................  Sale......................             540
Washington..............................  Non-Judicial..............  Sale......................             150
West Virginia...........................  Non-Judicial..............  Sale......................              60
Wisconsin...............................  Judicial--Abandoned.......  Confirmation..............             210
                                          Judicial--Tenant Occupied.  Confirmation..............             240
                                          Judicial--Owner Occupied..  Confirmation..............             330
Wyoming.................................  Non-Judicial..............  Sale......................             90
----------------------------------------------------------------------------------------------------------------
\1\ Western Counties of New York are: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Livingston, Monroe,
  Niagara, Ontario, Orleans, Steuben, Wayne, Wyoming, and Yates. The remaining counties are in Eastern New York.

    As for automatic extensions of timeframes due to delays beyond the 
control of the holder, VA has been developing its system to accomplish 
this, based on event updates provided by holders. In determining those 
events that are beyond the control of the holder, VA considered the 
policy of HUD and the other comments provided. VA believes the largest 
factor causing delays in foreclosures is the filing of bankruptcy 
petitions, and by receiving information on such actions as part of the 
normal event reporting, VA will have on hand the information to 
automatically adjust the interest computation date when calculating the 
claim payable under Sec.  36.4824.
    When VA receives notice of a bankruptcy filing, the system should 
automatically allow up to 180 calendar days to enable the servicer to 
obtain relief from the bankruptcy. VA believes this should be 
sufficient for most single filings and may cover some multiple 
bankruptcy cases. If more time is needed, the servicer can request 
approval from VA for additional time due to delays caused by multiple 
bankruptcy filings.
    VA believes that many of the other events mentioned in the comments 
as beyond the control of the holder are very infrequent and do not 
require a process to automatically account for those delays in claim 
calculation. First, this final rule provides VA the discretion to treat 
such delays as exceptions and then to allow the holder to justify 
charging additional interest if the delays extend completion of the 
liquidation past the timeframe calculated under Sec.  36.4824(a)(3). 
Given this discretionary authority, we do not find it necessary to 
incorporate specific rules as to infrequent events. Furthermore, VA 
does not believe that additional interest should be payable for delays 
that are generally within the control of the loan holder, such as title 
issues or missing documents that the holder should have resolved in the 
normal course of business, rather than waiting until termination to 
seek resolution. However, we recognize that some delays may require 
detailed

[[Page 6304]]

review and exchange of information to establish whether they were 
beyond the control of the holder. VA's regulations are flexible enough 
to allow for this.
    Comment: VA should eliminate the requirement for a promissory note 
in connection with deeds-in-lieu of foreclosure and compromise sales.
    VA Response: VA concurs. VA reviewed the proposed rule, Sec.  
36.4319a(f)(v), (g)(vi), and (h), which required a promissory note in 
connection with certain deeds-in-lieu of foreclosure and compromise 
sales, as well as the comments concerning the additional work required 
in calculating whether a promissory note would be required, and the 
work necessary to actually obtain such a note. Because the purpose in 
authorizing deeds and compromise sales is to expedite the processing of 
such alternatives, and because VA has the authority in Sec.  
36.4826(e)(1) to approve a complete release of the Secretary's right to 
collect a debt related to payment of a claim under the loan guaranty, 
and the law governing the program provides in 38 U.S.C. 3703(e) that 
the majority of veterans will not be liable for such indebtedness 
following loan default, VA has decided to automatically determine that 
the cooperation of the borrower in completing a deed-in-lieu of 
foreclosure or a compromise sale is sufficient to justify VA waiver of 
collection of any indebtedness. Accordingly, the final version of Sec.  
36.4822 does not require the holder to obtain a promissory note in 
connection with a deed-in-lieu of foreclosure or a compromise sale.
    VA has also removed the requirements proposed in Sec. Sec.  
36.4319a(f)(iii) and 36.4319a(g)(iv) that the holder determine that the 
estimated guaranty payment following a deed-in-lieu of foreclosure or 
compromise would not exceed the estimated payment if the loan proceeded 
to foreclosure. VA believes there will almost always be cost savings 
associated with deeds-in-lieu of foreclosure and compromise sales, and 
therefore will not require the holder to perform an additional 
calculation as part of the approval process. Cost savings will 
typically accrue from the reduced cost of a deed versus a foreclosure 
action, the likelihood that the borrower will be more cooperative in 
vacating a home after giving a deed instead of being foreclosed upon, 
and the probability that the home will be in better condition after the 
borrower gives a deed and arranges an orderly transfer of custody to 
the holder or VA's agent, rather than the property being abandoned due 
to foreclosure and subject to possible vandalism. In the case of a 
compromise claim, VA's requirement that the credit to the indebtedness 
equals or exceeds the net value of the property will generally ensure 
cost savings as compared to foreclosure, but even in the rare case when 
this does not occur, the benefit to the veteran of avoiding foreclosure 
through a private sale of the home is more than enough to justify 
acceptance of a compromise offer. The final rule in Sec.  36.4822 
incorporates the changes discussed in this section along with those not 
changed from the proposed rule.

36.4823 Election to Convey Security

    Comment: VA should clarify the procedures and implications of debt 
reductions used to ensure that a property is eligible for conveyance to 
VA.
    VA Response: VA has revised the applicable portions of the new 
final rule in Sec.  36.4823 to clarify the procedures to be followed to 
reduce debts in order to gain the right to convey to VA properties 
acquired at liquidation sales. Under the law (38 U.S.C. 3732(c)), if 
the calculation by the holder shows that the net value is less than the 
unguaranteed portion of the loan (i.e., the eligible indebtedness minus 
VA's maximum claim payable under the guaranty), then the property may 
not be conveyed to VA. VA has had a longstanding policy, however, of 
allowing holders to bring such a conveyance into statutory compliance 
by ``buying down'' the debt to a level where the unguaranteed portion 
of indebtedness is less than the net value. In these situations, 
holders must waive any liability a veteran might have otherwise with 
regard to the amount of indebtedness bought down.
    This policy would have continued under the proposal, but it would 
have been the holder, rather than VA, that was responsible for 
calculating the buy-down, if any, prior to a liquidation sale. VA 
received a number of comments expressing concern about the impact that 
any miscalculation would have on the holder, the servicer, and the 
veteran, and has therefore revised the final rule in Sec.  36.4823, so 
that a holder may wait until after the liquidation sale to determine 
the amount that must be bought down. To make sure the veteran is fully 
informed, the holder will be required to send the borrower notice no 
later than 15 calendar days after receipt of VA's guaranty claim 
payment that the indebtedness in excess of the net value and VA's claim 
payment has been waived. In addition, VA is revising the final rule in 
Sec.  36.4838 to designate the conveyance as of an administrative or 
procedural nature to allow for reasonable accommodations.
    Comment: VA should withdraw the proposal to require three year 
warranties when conveying property to VA, due to the additional burden 
this would place on servicers and foreclosure attorneys, who would bear 
the cost of insuring title to the property without receiving adequate 
compensation.
    VA Response: VA concurs. VA's goal in the proposed Sec.  36.4320(c) 
was to standardize and reduce the documentation required as evidence of 
acceptable title on properties conveyed to the Secretary. The comments 
received to the proposed rule provided additional insight on many 
aspects of the present processes that were not clearly evident to VA 
previously. For example, in many jurisdictions VA was paying for title 
insurance policies, but had little occasion to seek indemnity under 
those policies and believed that purchasing title policies was not cost 
effective. However, the comments disclosed that many title issues were 
resolved through the title examination required prior to issuance of 
the policies. Moreover, many attorneys commented that the compensation 
received for their participation in the sale of title insurance served 
to reduce the cost they charged for foreclosure services. It appears 
that if VA were to eliminate title insurance as an option to establish 
acceptability of title on properties conveyed to VA, foreclosure 
attorney fees would increase and many title issues would not be 
discovered until well after conveyance, which could cause considerable 
interruption in VA's resale efforts. Accordingly, VA is withdrawing the 
proposed requirement for a three year warranty, and will instead 
attempt to standardize document requirements nationwide as much as 
possible, which in most cases will still include an owner's title 
insurance policy issued after loan termination in the name of the 
Secretary along with minimal other documents, such as the state-
specific foreclosure document, the original deed of trust or mortgage, 
special warranty deed from the holder to the Secretary, an original or 
a copy of mortgagee's title policy, loan assignments, and appointment 
of substitute trustee. This information is maintained at the RLC level 
and will continue to be available in the same manner. Accordingly, the 
proposal to change Sec.  36.4320(c) to require a three year warranty on 
a conveyance is not included in the new final rule Sec.  36.4823.
    Comment: VA should require and pay for a title insurance policy in 
connection with a deed-in-lieu of foreclosure.

[[Page 6305]]

    VA Response: VA concurs. VA agrees that requiring a title policy in 
connection with a deed-in-lieu of foreclosure is necessary and would 
expedite the process of conveying a property to VA and the subsequent 
marketing of that property. Therefore, VA is revising the final rule in 
Sec.  36.4823(c)(4) to provide reimbursement for a title policy when a 
property is subsequently conveyed to VA by deed-in-lieu of foreclosure.

36.4824 Guaranty Claims; Subsequent Accounting

    Comment: VA should incorporate in its rule that any errors found in 
post claim audits will not be extrapolated over a servicer's prior 
claim submissions in an effort to recover claim payments that have not 
been actually identified.
    VA Response: VA does not concur, as VA does not believe that such a 
restrictive rule in Sec.  36.4824 would be in the best interests of the 
taxpayers supporting the VA home loan program. Extrapolation is 
basically the practice of reviewing a small sample of cases, 
determining an error rate, and then applying that error rate across an 
entire population of claims. While VA does not expect to routinely 
extrapolate in such a manner, this is a generally accepted tool of 
auditing that must be preserved.
    Before VA would reach the point of exercising this option, it would 
first follow-up with a holder/servicer to address errors that occurred 
on a routine basis, and would provide extensive notice of errors 
discovered that might lead to the extrapolation of errors across all 
claim submissions. VA does not expect that extrapolation will be 
applied except in the most egregious cases. Hence, we make no changes 
based on this comment.
    Comment: VA should not impose a one-year deadline for filing 
claims, or should at least make the penalty more reasonable, because 
the penalty far outweighs the impact of late filing. In addition, VA 
should wait until the end of any redemption period before starting the 
one-year deadline.
    VA Response: VA does not concur. The proposed rule Sec.  36.4321(d) 
required submission of a claim under guaranty no later than one year 
after the liquidation sale. To ensure accuracy in the Federal budget 
process, VA needs to know within a reasonable time that specific loans 
for particular cohort years have been terminated and that costs will be 
incurred. With the highly automated processes that are being 
implemented, VA believes that holders should be able to ascertain all 
necessary information and submit a claim within one year of the 
completion of the loan termination process, even if a redemption period 
exists in the particular jurisdiction. However, if there is some valid 
reason why an individual claim is not timely submitted, we will reserve 
the right to pay a late claim. Accordingly, VA Sec.  36.4838(a)(3) 
includes the failure to timely file a claim as a provision of an 
administrative or procedural nature that may be waived by an official 
named in Sec.  36.4845. The final rules in Sec.  36.4321(f) and Sec.  
36.4824(d) retain the requirement to submit a claim within one year 
after the liquidation sale. VA Sec.  36.4335 is not modified to include 
failure to timely file a claim as a provision of an administrative or 
procedural nature because all servicers will be under the new subpart F 
requirements in less than one year, so the need to grant relief under 
subpart B will not be necessary.

36.4828 Partial or Total Loss of Guaranty or Insurance

    Comment: The proposed rules did not discuss any plans to implement 
penalties for late or faulty reporting.
    VA Response: The ability to impose penalties already exists. Final 
rule Sec.  36.4828, based on current Sec.  36.4325, allows VA to adjust 
claims to the extent that any failure to comply with a regulation 
increases the ultimate liability of the Secretary. Therefore, no 
further provision is needed to establish VA's right to impose a penalty 
when a servicer's failure causes increased liability to VA. The new 
final rule Sec.  36.4828(b) is slightly different from the existing 
Sec.  36.4325(b) in order to improve its structure. In addition, while 
the proposed rule stated that in Sec.  36.4325 two citations (Sec.  
36.4325(b)(5) and (6)) would be deleted and replaced by one new 
citation for electronic reporting, in the final rule Sec.  36.4828(b), 
the one citation for electronic reporting (Sec.  36.4828(b)(4)) 
actually replaces what are three citations in the existing Sec.  
36.4325(b)(4), (5) and (6).

36.4833 Maintenance of Records

    Comment: Servicers should not be required to submit audit 
documentation to VA in a particular imaged format as a condition of 
doing business with VA.
    VA Response: VA concurs. VA did not intend to require a specific 
imaging format, but inadvertently did so by citing only three specific 
formats in the proposed rule. This has been changed in the final Sec.  
36.4833 to provide that required documents sent to VA electronically be 
in .jpg, .gif, .pdf, or a similarly widely accepted format.
    Comment: Servicers should not be required to provide imaged 
documents for audits, as this will greatly increase their costs.
    VA Response: VA does not concur. Servicers are presently required 
by VA policy and the authority in Sec.  36.4330 to submit paper 
documentation with all claims under the guaranty. That involves copying 
all documents related to payments received on a loan, disbursements 
chargeable thereto, and the dates thereof, including copies of bills 
and receipts for such disbursements, which may require conversion of 
electronic documents to paper form. VA proposed instead in Sec.  
36.4321(d) that servicers submit the information in those documents in 
an electronic format when filing a claim, while retaining the 
supporting documents in the event of a post-claim audit by VA. Post-
claim audits by VA will typically involve only a percentage sampling of 
submitted claims, so the number of cases for which documentation will 
eventually be submitted to VA will be greatly reduced. VA does not 
specify how servicers must retain documents in order to comply with 
this or any other regulatory and statutory requirements, but will allow 
a reasonable period of time for access to the documents upon request. 
The proposed requirement to submit electronically only the documents on 
cases selected for post-audit should be much less of a burden on 
servicers, because even if converting a document to electronic format 
may be more costly than making a paper copy, the overall reduction in 
the number of documents that must be submitted should result in lower 
costs. Therefore, VA finds no basis for changing the proposal in the 
final rule Sec.  36.4833.
    Comment: The proposed exception to allow submission of paper 
documents based on size of servicing portfolio is confusing.
    VA Response: VA concurs and has deleted this exception in the final 
rule Sec.  36.4833. The fast-paced growth in technology has resulted in 
its wider availability at ever decreasing costs, so the requirement for 
electronic submission of documents to VA will not create a significant 
burden for a servicer of any size.
    VA has also corrected erroneous dates that appeared in the proposed 
Sec.  36.4330(c). When the rule was being drafted it was hoped that it 
could be effective October 1, 2005, and that date was intended to apply 
to both types of documentation required, even though the second date 
was shown as October 1, 2004. In the final Sec.  36.4833 both dates are 
shown as the effective date of the new rule.

[[Page 6306]]

36.4836 [Reserved]

    The corresponding Sec.  36.4333 titled ``Satisfaction of 
indebtedness'' will not be included in subpart F. This is because the 
new final Sec.  36.4817(c)(1) requires electronic reporting of loans 
paid in full, thereby obviating the need for instructions on paper 
notification of payment in full. This Sec.  36.4836 will be shown as 
reserved for future use.

36.4838 Supplementary Administrative Action

    In response to several comments about the need for discretion on 
the exercise of new authorities in the new subpart F, VA is including 
in the new final Sec.  36.4838 additional items of an administrative or 
procedural nature, including some which replace existing items in the 
corresponding section of subpart B.

36.4848 Servicer Appraisal Processing Program

    Comment: Servicers expressed concern about accepting the risk that 
VA might later determine that values rendered by the Servicer Appraisal 
Processing Program (SAPP) were too high and then adjust claims or even 
reconvey properties. Servicers also expressed concern that they would 
be unable to employ sufficient numbers of staff review appraisers, and 
instead want to rely only on values provided by VA-approved appraisers.
    VA Response: VA believes that servicers should not be concerned 
about these matters. VA presently prescribes uniform qualifications for 
appraisers in accordance with 38 U.S.C. 3731. However, that same 
section requires review by VA of appraisal reports prior to determining 
the reasonable value of a property that is the security for a VA-
guaranteed loan. Public Law 100-198, enacted December 21, 1987, 
authorized the Lender Appraisal Processing Program (LAPP), which 
enables VA to permit qualified lenders to review loan-origination 
appraisals, ensure adherence to VA-published minimum property 
requirements, and set the reasonable value of properties for purposes 
of determining the maximum loan VA could guarantee.
    VA's experience is that delegating appraisal reviews to lenders 
under the LAPP has worked well and often expedites the loan-origination 
process. About 95% of all new appraisals are reviewed under LAPP. The 
number of appraisals required for loan liquidation purposes is 
significantly lower than the number related to new loan originations, 
amounting to about 15% of total appraisals reviewed. With lenders 
employing enough qualified staff appraisal reviewers to handle 95% of 
new appraisals, there should be no shortage of reviewers available to 
handle the much lower volume of liquidation appraisals.
    Servicers should have no concerns about VA reconveying properties 
due to value increases made by staff appraisal reviewers, as VA 
regulations do not provide for such a practice. As contained in the 
proposed rule, the final rule in Sec. Sec.  36.4344a(d) and 36.4848(d) 
does retain the right for VA to be indemnified for additional loss 
caused by an increase in value made by the servicer that was 
unwarranted, or arbitrary and capricious. The final rule in Sec. Sec.  
36.4344a(h) and 36.4848(h) also retains provisions to withdraw, for 
proper cause, authority of servicers to determine reasonable values, 
such as determination of a pattern of appraisal reviews being conducted 
in a careless or negligent manner, especially after being called to the 
servicer's attention. Such withdrawal of authority would simply return 
servicers to the position of waiting for VA staff appraisers to review 
liquidation appraisals and establish reasonable values, rather than 
being able to more quickly establish fair market value and determine 
the net value of the property for liquidation purposes. Accordingly, we 
make no changes based on this comment.

36.4850 Servicing Procedures for Holders

    Comment: VA should adjust the timeframe for reporting abandoned 
properties in relation to the date on which inspections will be 
required. VA should also retain the 15-day reporting schedule rather 
than the proposed 5-day rule.
    VA Response: VA concurs. In the proposed Sec.  36.4346(i) VA 
intended simply to ensure prompt notice when a holder learns of an 
abandoned property, which could occur prior to verification through a 
required property inspection. However, VA agrees that the majority of 
notices about abandoned property will be the result of property 
inspections, which will not typically be received until a loan is at 
least 60 days delinquent, and is therefore changing the final rule 
accordingly. Reporting of this event will fall under the provisions of 
the final rule in 38 CFR 36.4817(c)(10), which will require reporting 
no later than the 7th calendar day of the month following the month the 
occupancy status change was verified.
    Comment: VA should reconsider the requirements related to 
abandonment and extraordinary waste or hazard.
    VA Response: VA concurs. Since the time of the proposed rule change 
to Sec.  36.4346(i)(2), events such as Hurricane Katrina have 
demonstrated the difficulty in mandating loan termination due to the 
appearance of the potential for extraordinary waste. VA has even issued 
guidance to holders following Katrina to exercise additional caution 
before deciding that a property in a major disaster area could be 
subject to additional waste because of an apparent lack of care, since 
many people were displaced without the resources to quickly return and 
attempt repairs to their homes. Therefore, VA is deleting that part of 
the proposed rule that would have added ``extraordinary waste or 
hazard''.
    The first two sentences of the existing rule Sec.  36.4346(i)(2) 
describe actions to be taken when a holder obtains information that 
``indicates'' a property may be abandoned, and the proposed rule change 
was primarily to conform reporting requirements to the proposed rule 
Sec.  36.4315a. VA believes that while the term abandoned may be 
somewhat subjective, there are obvious situations, such as when the 
borrower mails in the keys and advises the holder that no further 
payments will be made, in which a holder will have no doubt that the 
property is abandoned. The existing rule calls for action that should 
lead to confirmation of whether or not a property is actually 
abandoned. Thus, the final rule in Sec.  36.4850(i)(2) will retain the 
mandate to report abandonment in accordance with Sec.  36.4817(c)(10) 
as a change in occupancy status and initiate termination when 
abandonment has been confirmed.
    Comment: In changing the requirement for provision of an annual 
statement for income tax purposes, VA should be consistent with 
Internal Revenue Service (IRS) requirements.
    VA Response: VA concurs. It was VA's intent in the proposed 
revision to Sec.  36.4346(c) to change from 60 days to 30 days to 
achieve that consistency. However, the comment pointed out that IRS 
requires annual statements be sent no later than January 31st of each 
year, so VA's requirement of 30 days would be different. Accordingly, 
the final rule Sec.  36.4850(c) has been changed to require an annual 
statement be provided before February 1st of each calendar year.

36.4979 Payment of Insurance

    As with Sec.  36.4809, this requires a conforming amendment in the 
final rule. The existing rule in Sec.  36.4374 refers to a time period 
specified in Sec.  36.4316, which is three months. Because reporting 
and processing of

[[Page 6307]]

defaults are handled differently in the new rules in Sec. Sec.  36.4800 
through 36.4893, inclusive, there is not a similar waiting period 
specified in Sec.  36.4818. Therefore, the final rule in Sec.  36.4879 
will replace the reference to another section with the actual time 
frame of three months. There is a similar situation with a reference in 
Sec.  36.4374 to reporting under Sec.  36.4317, and in this case the 
final rule in Sec.  36.4879 will refer to the applicable reporting 
required by Sec. Sec.  36.4817 and 36.4850.

Restructuring of and Authority for Part 36

    In order to make it easier to refer to the new Sec. Sec.  36.4800 
through 36.4893, inclusive, VA is designating those sections as subpart 
F of part 36. VA is grouping other portions of part 36 into appropriate 
subparts as shown in this notice. Also, to make it easier to identify 
the appropriate authority for each section of the new subpart F, VA is 
revising the citation for the authority of part 36 to refer only to the 
general authorities, and is including the specific appropriate 
authority for each section in the new subpart F.

Administrative Procedures Act

    Pursuant to 5 U.S.C. 553(d)(3), we find that there is good cause to 
dispense with the 30-day delayed effective date requirement. The public 
has received extensive knowledge of the changes effected by the new 
rules through the initial publication of the proposed rules and two 
supplemental notices of revisions to the initial proposals, and VA has 
received advice that the public is anxious for the new rules to be 
effective.
    One of the primary changes in the new rules is the implementation 
of electronic reporting of information on VA-guaranteed home loans. Due 
to the extensive time required for information technology system 
changes, industry participants in the VA home loan program initiated 
development work on the system changes soon after the first 
supplemental notice provided sufficient details. The first industry 
segment under the planned phased implementation is prepared to begin 
operations under the proposed changes immediately upon publication of 
the new rules, and any delays in implementation would create financial 
burdens as they continue to operate under the old rules while 
maintaining additional system capability for operations under the new 
rules. Moreover, all other industry segments will not be subject to 
these electronic reporting rules for more than 30 days after these 
rules become effective, and therefore the 30-day delayed effective date 
would not affect any segment other than the first. VA is also prepared 
to accept electronic reporting upon publication of the new rules, and 
veterans will begin to benefit from the new rules as soon as they are 
effective. Any delays will be financially costly to the Government, 
both in terms of additional contracting support required until final 
implementation, and with respect to the loss of savings expected for 
the program under the new rules.
    The changing economic situation, with increasing numbers of 
foreclosures nationwide, also contributes to the need for immediate 
implementation of the new rules for several reasons. The new 
environment for servicing VA-guaranteed home loans created by these 
rules will encourage earlier additional loss mitigation efforts by 
private servicers in place of the present Government outreach at later 
stages of loan default. These earlier efforts should result in more 
veterans being able to reinstate delinquent loans and avoiding 
foreclosure. This will also result in fewer claims paid by VA, while 
the claims actually paid will be less under the new rules due to the 
standardized timeframes for completing termination in those cases where 
it is unavoidable. In addition, the increased legal fees for 
termination allowed under the new rules will ensure that VA-guaranteed 
loans receive the same priority as those of other guarantors, insurers 
and investors in the termination process, thereby avoiding the costs 
associated with undue delays.
    Due to the issues described above, it is imperative that the new 
rules become effective immediately upon publication. Accordingly, there 
is good cause under section 553(d)(3) to dispense with the 30-day 
delayed effective date requirement.

Paperwork Reduction Act of 1995

    This final rule contains provisions that constitute collections of 
information under the Paperwork Reduction Act (44 U.S.C. 3501-3521). In 
the preamble of the proposed rule, we described the information 
collections that would need OMB approval and provided a comment period. 
OMB has approved those proposed collections and has assigned control 
numbers 2900-0021, 2900-0045, 2900-0112, 2900-0362, and 2900-0381. OMB 
assigns control numbers to collections of information it approves. VA 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless it displays a currently valid OMB 
control number.

Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 
1532, that agencies prepare an assessment of anticipated costs and 
benefits before issuing any rule that may result in an expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more (adjusted annually for 
inflation) in any given year. This final rule will have no such effect 
on State, local, and tribal governments, or on the private sector.

Executive Order 12866

    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, when regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety, 
and other advantages; distributive impacts; and equity). The Executive 
Order classifies a ``significant regulatory action,'' requiring review 
by the Office of Management and Budget (OMB) unless OMB waives such 
review, as any regulatory action that is likely to result in a rule 
that may: (1) Have an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities; (2) create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency; (3) materially alter 
the budgetary impact of entitlements, grants, user fees, or loan 
programs or the rights and obligations of recipients thereof; or (4) 
raise novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in the Executive 
Order.
    The economic, interagency, budgetary, legal, and policy 
implications of this final rule have been examined, and it has been 
determined to be a significant regulatory action under Executive Order 
12866.

Regulatory Flexibility Act

    The Secretary hereby certifies that this final rule would not have 
a significant economic impact on a substantial number of small entities 
as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601 et 
seq. The vast majority of VA loans are serviced by very large financial 
companies. Only a handful of small entities service VA loans and they 
service only a very small number of loans. This rule, which only 
impacts veterans, other individual

[[Page 6308]]

obligors with guaranteed loans, and companies that service VA loans, 
will have very minor impact on a very small number of small entities 
servicing such loans. Therefore, pursuant to 5 U.S.C. 605(b), this rule 
is exempt from the initial and final regulatory flexibility analysis 
requirements of sections 603 and 604.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance program number and title 
for this program is 64.114, Veterans Housing Guaranteed and Insured 
Loans.

List of Subjects in 38 CFR Part 36

    Condominiums, Handicapped, Housing, Indians, Individuals with 
disabilities, Loan programs--housing and community development, Loan 
programs--Indians, Loan programs--veterans, Manufactured homes, 
Mortgage insurance, Reporting and recordkeeping requirements, Veterans.

    Approved: October 24, 2007.
Gordon H. Mansfield,
Acting Secretary of Veterans Affairs.

    Editorial Note: This document was received at the Office of the 
Federal Register on January 23, 2008.

0
For the reasons set out in the preamble, 38 CFR part 36 is amended as 
set forth below.

PART 36--LOAN GUARANTY

0
1. The authority citation for part 36 is revised to read as follows:

    Authority: 38 U.S.C. 501 and as otherwise noted.


0
2. Remove the undesignated center heading preceding Sec.  36.4201 and 
the authority citation directly below that center heading.

0
3. A heading for subpart A is added preceding Sec.  36.4201 to read as 
follows:

Subpart A--Guaranty of Loans to Veterans to Purchase Manufactured 
Homes and Lots, Including Site Preparation

* * * * *

0
4. Remove the undesignated center heading preceding Sec.  36.4300 and 
the authority citation directly below that center heading.

0
5. A heading for subpart B is added preceding Sec.  36.4300 to read as 
follows:

Subpart B--Guaranty or Insurance of Loans to Veterans

* * * * *

0
6. Revise Sec.  36.4313(b)(5) to read as follows:


Sec.  36.4313  Advances and other charges.

* * * * *
    (b) * * *
    (5)(i) Fees for legal services actually performed, not to exceed 
the reasonable and customary fees for such services in the State where 
the property is located, as determined by the Secretary.
    (ii) In determining what constitutes the reasonable and customary 
fees for legal services, the Secretary shall review allowances for 
legal fees in connection with the foreclosure of single-family housing 
loans, including bankruptcy-related services, issued by HUD, Fannie 
Mae, and Freddie Mac. The Secretary will review such fees annually and, 
as the Secretary deems necessary, publish in the Federal Register a 
table setting forth the amounts the Secretary determines to be 
reasonable and customary. The table will reflect the primary method for 
foreclosing in each state, either judicial or non-judicial, with the 
exception of those States where either judicial or non-judicial is 
acceptable. The use of a method not authorized in the table will 
require prior approval from VA. This table will be available throughout 
the year on a VA controlled Web site, such as at www.homeloans.va.gov.
    (iii) If the foreclosure attorney has the discretion to conduct the 
sale or to name a substitute trustee to conduct the sale, the combined 
total paid for legal fees under paragraph (b)(5)(i) of this section and 
trustee's fees pursuant to paragraph (b)(4) of this section shall not 
exceed the applicable maximum allowance for legal fees established 
under paragraph (b)(5)(ii) of this section. If the trustee conducting 
the sale must be a Government official under local law, or if an 
individual other than the foreclosing attorney (or any employee of that 
attorney) is appointed as part of judicial proceedings, and local law 
also establishes the fees payable for the services of the public or 
judicially appointed trustee, then those fees will not be subject to 
the maximum established for legal fees under paragraph (b)(5)(ii) of 
this section and may be included in the total indebtedness.
* * * * *

0
7. Amend Sec.  36.4321 by adding paragraph (f) immediately before the 
authority citation at the end of the section to read as follows:


Sec.  36.4321  Computation of guaranty claims; subsequent accounting.

* * * * *
    (f)(1)(i) Except as provided in paragraph (f)(1)(ii) of this 
section, a holder shall file a claim for payment under the guaranty no 
later than 1 year after the completion of the liquidation sale. For 
purposes of this section, the liquidation sale will be considered 
completed when:
    (A) The last act required under State law is taken to make the 
liquidation sale final, but excluding any redemption period permitted 
under State law;
    (B) If a holder accepts a voluntary conveyance of the property in 
lieu of foreclosure, the date of recordation of the deed to the holder 
or the holder's designee; or
    (C) In the case of a sale of the property to a third party for an 
amount less than is sufficient to repay the unpaid balance on the loan 
where the holder has agreed in advance to release the lien in exchange 
for the proceeds of such sale, the date of settlement of such sale.
    (ii) With respect to any liquidation sale completed prior to 
February 1, 2008, all claims must be submitted no later than February 
2, 2009.
    (2) If additional information becomes known to a holder after the 
filing of a guaranty claim, the holder may file a supplemental claim 
provided that such supplemental claim is filed within the time period 
specified in paragraph (f)(1) of this section.
    (3) No claim under a guaranty shall be payable unless it is 
submitted within the time period specified in paragraph (f)(1) of this 
section.
    (4) In the event that VA does not approve payment of any item 
submitted under a guaranty claim, VA shall notify the holder what items 
are being denied and the reasons for such denial. The holder may, 
within 30 days after the date of such denial notification, submit a 
request to VA that one or more items that were denied be reconsidered. 
The holder must present any additional information justifying payment 
of items denied.
* * * * *

0
8. Add Sec.  36.4344a to read as follows:


Sec.  36.4344a  Servicer appraisal processing program (SAPP).

    (a) Delegation of authority to servicers to review liquidation 
appraisals and determine reasonable value. Based on the reasonable 
value, the servicer will be able to determine net value.
    (1) To be eligible for delegation of authority to review VA 
liquidation appraisals and determine the reasonable value for 
liquidation purposes on properties secured by VA guaranteed or insured 
loans, a lender must--
    (i) Have automatic processing authority under 38 U.S.C. 3702(d), 
and
    (ii) Employ one or more Staff Appraisal Reviewers (SAR) acceptable 
to the Secretary.

[[Page 6309]]

    (2) To qualify as a servicer's staff appraisal reviewer an 
applicant must be a full-time member of the servicer's permanent staff 
and may not be employed by, or perform services for, any other 
mortgagee. The individual must not engage in any private pursuits in 
which there will be, or appear to be, any conflict of interest between 
those pursuits and his/her duties, responsibilities, and performance as 
a SAPP staff appraisal reviewer. Three years of appraisal related 
experience is necessary to qualify as a servicer's staff appraisal 
reviewer. That experience must demonstrate knowledge of, and the 
ability to apply industry-accepted principles, methods, practices and 
techniques of appraising, and the ability to competently determine the 
value of property. The individual must demonstrate the ability to 
review the work of others and to recognize deviations from accepted 
appraisal principle, practices, and techniques, error in computations, 
and unjustifiable and unsupportable conclusions.
    (3) Servicers that have a staff appraisal reviewer determined 
acceptable to VA, will be authorized to review liquidation appraisals 
and make reasonable value determinations for liquidation purposes on 
properties that are the security for VA guaranteed or insured loans. 
Additionally, servicers must satisfy initial VA office case review 
requirements prior to being allowed to determine reasonable value 
without VA involvement. The initial office case review requirement must 
be satisfied in the VA regional loan center in whose jurisdiction the 
servicer's staff appraisal reviewer is located before the SAPP 
authority may be utilized by that servicer in any other VA office's 
jurisdiction. To satisfy the initial office case review requirement, 
the first five cases of each servicer staff appraisal reviewer 
involving properties in the regional office location where the staff 
appraisal reviewer is located will be processed by him or her up to the 
point where he or she has made a reasonable value determination and 
fully drafted, but not issued, the servicer's notice of value. At that 
point, and prior to loan termination, each of the five cases will be 
submitted to the VA regional loan center having jurisdiction over the 
property. After a staff review of each case, VA will issue a notice of 
value which the servicer may use to compute the net value of the 
property for liquidation purposes. If these five cases are found to be 
acceptable by VA, the servicer's staff appraisal reviewer will be 
allowed to fully process subsequent appraisals for properties 
regardless of jurisdictional location without prior submission to VA 
and issuance by VA of a notice of value. Where the servicer's reviewer 
cannot readily meet the jurisdictional review requirement, the SAR 
applicant may request that VA expand the geographic area of 
consideration. VA will accommodate such requests if practicable. The 
initial office case review requirement may be expanded by VA if 
acceptable performance has not been demonstrated. After satisfaction of 
the initial office case review requirement, routine reviews of SAPP 
cases will be made by VA staff based upon quality control procedures 
established by the Under Secretary for Benefits. Such review will be 
made on a random sampling or performance related basis.
    (4) Certifications required from the servicer will be specified 
with particularity in the separate instructions issued by the 
Secretary, as noted in paragraph (b) of this section.
    (b) Instructions for SAPP Procedures. The Secretary will publish 
separate instructions for processing appraisals under the Servicer 
Appraisal Processing Program. Compliance with these regulations and the 
separate instructions issued by the Secretary is deemed by VA to be the 
minimum exercise of due diligence in processing SAPP cases. Due 
diligence is considered by VA to represent that care, as is to be 
properly expected from, and ordinarily exercised by, a reasonable and 
prudent servicer who would be dependent on the property as security to 
protect its investment.
    (c) Adjustment of value recommendations. The amount of authority to 
upwardly adjust the fee appraiser's estimated market value during the 
servicer staff appraisal reviewer's initial review of the appraisal 
report or to subsequently process an appeal of the servicer's 
established reasonable value will be specified in the separate 
instructions issued by VA as noted in Sec.  36.4344a(b). The amount 
specified must not in any way be considered an administrative 
adjustment figure which may be applied indiscriminately and without 
valid basis or justification.
    (1) Adjustment during initial review. Any adjustment during the 
staff appraisal reviewer's initial review of the appraisal report must 
be fully and clearly justified in writing on the appraisal report form 
or, if necessary, on an addendum. The basis for the adjustment must be 
adequate and reasonable by professional appraisal standards. If real 
estate market or other valid data was utilized in arriving at the 
decision to make the adjustment, such data must be attached to the 
appraisal report. All adjustments, comments, corrections, 
justifications, etc., to the appraisal report must be made in a 
contrasting color, be clearly legible, and signed and dated by the 
staff appraisal reviewer.
    (2) Processing appeals. The authority provided under 38 U.S.C. 
3731(d) which permits a lender to obtain a VA fee panel appraiser's 
report which VA is obligated to consider in an appeal of the 
established reasonable value shall not apply to cases processed under 
the authority provided by this section. All appeals of VA fee 
appraiser's estimated market values or servicer's reasonable value 
determinations above the amount specified in the separate instructions 
issued by VA must be submitted, along with the servicer's 
recommendations, if any, to VA for processing and final determination. 
Unless otherwise authorized in the separate instructions servicers must 
also submit appeals, regardless of the amount, to VA in all cases where 
the staff appraisal reviewer has made an adjustment during their 
initial review of the appraisal report to the fee appraiser's market 
value estimate. The fee appraiser's estimated market value or 
servicer's reasonable value determination may be increased only when 
such increase is clearly warranted and fully supported by real estate 
market or other valid data considered adequate and reasonable by 
professional appraisal standards and the servicer's staff appraisal 
reviewer clearly and fully justifies the reasoning and basis for the 
increase in writing on the appraisal report form or an addendum. The 
staff appraisal reviewer must date and sign the written justification 
and must cite within it the data used in arriving at the decision to 
make the increase. All such data shall be attached to the appraisal 
report form and any addendum.
    (d) Indemnification. When the Secretary has incurred a loss as a 
result of a payment of claim under guaranty and in which the Secretary 
determines an increase made by the servicer under paragraph (c) of this 
section was unwarranted, or arbitrary and capricious, the lender shall 
indemnify the Secretary to the extent the Secretary determines such 
loss was caused or increased, by the increase in value.
    (e) Affiliations. A servicer affiliated with a real estate firm, 
builder, land developer or escrow agent as a subsidiary division, or in 
any other entity in which it has a financial interest or which it owns 
may not use the authority for any cases involving the affiliate unless 
the servicer demonstrates to the Secretary's

[[Page 6310]]

satisfaction that the servicer and its affiliate(s) are essentially 
separate entities that operate independently of each other, free of all 
cross-influences (e.g., a formal corporate agreement exists which 
specifically sets forth this fact).
    (f) Quality control plans. The servicer must have an effective 
self-policing or quality control system to ensure the adequacy and 
quality of their SAPP staff appraisal reviewer's processing and, that 
its activities do not deviate from high standards of integrity. The 
quality control system must include frequent, periodic audits that 
specifically address the appraisal review activity. These audits may be 
performed by an independent party, or by the servicer's independent 
internal audit division which reports directly to the firm's chief 
executive officer. The servicer must agree to furnish findings and 
information under this system to VA on demand. While the quality 
control personnel need not be appraisers, they should have basic 
familiarity with appraisal theory and techniques and the ability to 
prescribe appropriate corrective action(s) in the appraisal review 
process when discrepancies or problems are identified. The basic 
elements of the system will be described in separate instructions 
issued by the Secretary. Copies of the lender's quality control plan or 
self-policing system evidencing appraisal related matters must be 
provided to the VA office of jurisdiction with the servicer's 
application of SAPP authority.
    (g) Fees. The Secretary will require servicers to pay a $100.00 
application fee for each SAR the servicer nominates for approval. The 
application fee will also apply if the SAR begins work for another 
servicer.
    (h) Withdrawal of servicer authority. The authority for a servicer 
to determine reasonable value may be withdrawn by the Loan Guaranty 
Officer when proper cause exists. A servicer's authority to make 
reasonable value determinations shall be withdrawn when the servicer no 
longer meets the basic requirements for delegating the authority, or 
when it can be shown that the servicer's reasonable value 
determinations have not been made in accordance with VA regulations, 
requirements, guidelines, instructions or applicable laws, or when 
there is adequate evidence to support reasonable belief by VA that a 
particular unacceptable act, practice, or performance by the servicer 
or the servicer's staff has occurred. Such acts, practices, or 
performance include, but are not limited to: Demonstrated technical 
incompetence (i.e., conduct which demonstrates an insufficient 
knowledge of industry accepted appraisal principles, techniques and 
practices; or the lack of technical competence to review appraisal 
reports and make value determinations in accordance with those 
requirements); substantive or repetitive errors (i.e., any error(s) of 
a nature that would materially or significantly affect the 
determination of reasonable value or condition of the property; or a 
number or series of errors that, considered individually, may not 
significantly impact the determination of reasonable value or property 
condition, but which when considered in the aggregate would establish 
that appraisal reviews or SAPP case processing are being performed in a 
careless or negligent manner), or continued instances of disregard for 
VA requirements after they have been called to the servicer's 
attention.
    (1) Withdrawal of authority by the Loan Guaranty Officer may be 
either for an indefinite or a specified period of time. For any 
withdrawal longer than 90 days a reapplication for servicer authority 
to process appraisals under these regulations will be required. Written 
notice will be provided at least 30 days in advance of withdrawal 
unless the Government's interests are exposed to immediate risk from 
the servicer's activities in which case the withdrawal will be effected 
immediately. The notice will clearly and specifically set forth the 
basis and grounds for the action. There is no right to a formal hearing 
to contest the withdrawal of SAPP processing privileges. However, if 
within 15 days after receiving notice the servicer requests an 
opportunity to contest the withdrawal, the servicer may submit, in 
person, in writing, or through a representative, information and 
argument to the Loan Guaranty Officer in opposition to the withdrawal. 
The Loan Guaranty Officer will make a recommendation to the Regional 
Loan Center Director who shall make the determination as to whether the 
action should be sustained, modified or rescinded. The servicer will be 
informed in writing of the decision.
    (2) The servicer has the right to appeal the Regional Loan Center 
Director's decision to the Undersecretary for Benefits. In the event of 
such an appeal, the Under Secretary for Benefits will review all 
relevant material concerning the matter and make a determination that 
shall constitute final agency action. If the servicer's submission of 
opposition raises a genuine dispute over facts material to the 
withdrawal of SAPP authority, the servicer will be afforded an 
opportunity to appear with a representative, submit documentary 
evidence, present witnesses and confront any witness the Veterans 
Benefits Administration presents. The Under Secretary for Benefits will 
appoint a hearing officer or panel to conduct the hearing. When such 
additional proceedings are necessary, the Under Secretary for Benefits 
shall base the determination on the facts as found, together with any 
information and argument submitted by the servicer.
    (3) In actions based upon a conviction or civil judgment, or in 
which there is no genuine dispute over material facts, the Under 
Secretary for Benefits shall make a decision on the basis of all the 
information in the administrative record, including any submission made 
by the servicer.
    (4) Withdrawal of the SAPP authority will require that VA make 
subsequent determinations of reasonable value for the servicer. 
Consequently, VA staff will review each appraisal report and issue a 
Notice of Value which can then be used by the servicer to compute the 
net value of properties for liquidation purposes.
    (5) Withdrawal by VA of the servicer's SAPP authority does not 
prevent VA from also withdrawing automatic processing authority or 
taking debarment or suspension action based upon the same conduct of 
the servicer.

(Authority: 38 U.S.C. 3731)


0
9. Remove the undesignated center heading preceding Sec.  36.4400 and 
the authority citation directly below that center heading.

0
10. A heading for subpart C is added preceding Sec.  36.4400 to read as 
follows:

Subpart C--Assistance to Certain Disabled Veterans in Acquiring 
Specially Adapted Housing

* * * * *

0
11. Remove the undesignated center heading preceding Sec.  36.4500 and 
the authority citation directly below that center heading.

0
12. A heading for subpart D is added preceding Sec.  36.4500 to read as 
follows:

Subpart D--Direct Loans

* * * * *

0
13. Remove the undesignated center heading preceding Sec.  36.4600 and 
the authority citation directly below that center hearing.

0
14. A heading for subpart E is added preceding Sec.  36.4600 to read as 
follows:

Subpart E--Sale of Loans, Guarantee of Payment, and Flood Insurance

* * * * *

0
15. Add subpart F to read as follows:

[[Page 6311]]

Subpart F--Guaranty or Insurance of Loans to Veterans With Electronic 
Reporting
Sec.
36.4800 Applicability of this subpart.
36.4801 Definitions.
36.4802 Computation of guaranties or insurance credits.
36.4803 Reporting requirements.
36.4804 Deviations; changes of identity.
36.4805 Partial disbursement.
36.4806 Refinancing of mortgage or other lien indebtedness.
36.4807 Interest rate reduction refinancing loan.
36.4808 Joint loans.
36.4809 Transfer of title by borrower or maturity by demand or 
acceleration.
36.4810 Amortization.
36.4811 Prepayment.
36.4812 Interest rates.
36.4813 Charges and fees.
36.4814 Advances and other charges.
36.4815 Loan modifications.
36.4816 Acceptability of partial payments.
36.4817 Servicer reporting requirements.
36.4818 Servicer tier ranking--temporary procedures.
36.4819 Servicer loss-mitigation options and incentives.
36.4820 Refunding of loans in default.
36.4821 Service of process.
36.4822 Loan termination.
36.4823 Election to convey security.
36.4824 Guaranty claims; subsequent accounting.
36.4825 Computation of indebtedness.
36.4826 Subrogation and indemnity.
36.4827 Release of security.
36.4828 Partial or total loss of guaranty or insurance.
36.4829 Hazard insurance.
36.4830 Substitution of trustees.
36.4831 Capacity of parties to contract.
36.4832 Geographical limits.
36.4833 Maintenance of records.
36.4835 Delivery of notice.
36.4836 [Reserved].
36.4837 Conformance of loan instruments.
36.4838 Supplementary administrative action.
36.4839 Eligibility of loans; reasonable value requirements.
36.4840 Underwriting standards, processing procedures, lender 
responsibility, and lender certification.
36.4841 Death or insolvency of holder.
36.4842 Qualification for designated fee appraisers.
36.4843 Restriction on designated appraisers.
36.4845 Delegation of authority.
36.4846 Cooperative loans.
36.4847 Lender appraisal processing program.
36.4848 Servicer appraisal processing program.
36.4849 Waivers, consents, and approvals; when effective.
36.4850 Servicing procedures for holders.
36.4851 Minimum property and construction requirements.
36.4852 Authority to close loans on the automatic basis.
36.4853 Withdrawal of authority to close loans on the automatic 
basis.
36.4854 Estate of veteran in real property.
36.4855 Loans, first, second, or unsecured.
36.4856 Tax, special assessment and other liens.
36.4857 Combination residential and business property.
36.4858 [Reserved]
36.4859 Supplemental loans.
36.4860 Condominium loans.
36.4861 Acceptable ownership arrangements and documentation.
36.4862 Rights and restrictions.
36.4863 Miscellaneous legal requirements.
36.4864 Documentation and related requirements-flexible condominiums 
and condominiums with offsite facilities.
36.4865 Appraisal requirements.
36.4867 Requirement of construction warranty.
36.4868 Nondiscrimination and equal opportunity in housing 
certification requirements.
36.4869 Correction of structural defects.
36.4870 Advertising and solicitation requirements.
36.4875 Insured loan and insurance account.
36.4877 Transfer of insured loans.
36.4878 Debits and credits to insurance account under Sec.  36.4820.
36.4879 Payment of insurance.
36.4880 Reports of insured institutions.
36.4890 Purpose.
36.4891 Applicability.
36.4892 Certification requirements.
36.4893 Complaint and hearing procedure.

Subpart F--Guaranty or Insurance of Loans to Veterans With 
Electronic Reporting


Sec.  36.4800  Applicability of this subpart.

    (a) This subpart applies to loans serviced by a mortgage servicing 
industry segment on or after the date that VA issues a Federal Register 
notice making this subpart applicable to that segment. This includes 
loans entitled to an automatic guaranty, or otherwise guaranteed or 
insured, on or after the date assigned in the Federal Register, and 
loans that were previously guaranteed or insured to the extent that no 
legal rights vested under the regulations are impaired.
    (b) Title 38 U.S.C., chapter 37, is a continuation and restatement 
of the provisions of Title III of the Servicemen's Readjustment Act of 
1944, and may be considered an amendment to such Title III. References 
to the sections or chapters of title 38 U.S.C., shall, where 
applicable, be deemed to refer to the prior corresponding provisions of 
the law.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4801  Definitions.

    Whenever used in 38 U.S.C. chapter 37 or subpart F of this part, 
unless the context otherwise requires, the terms defined in this 
section shall have the following meaning:
    A period of more than 180 days. For the purposes of sections 3707 
and 3702(a)(2)(C) of title 38 U.S.C., the term a period of more than 
180 days shall mean 181 or more calendar days of continuous active 
duty.
    Acquisition and improvement loan. A loan to purchase an existing 
property which includes additional funds for the purpose of installing 
energy conservation improvements or making other alterations, 
improvements, or repairs.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(1), (4), and (7))

    Alterations. Any structural changes or additions to existing 
improved realty.
    Automatic lender. A lender that may process a loan or assumption 
without submitting the credit package to the Department of Veterans 
Affairs for underwriting review. Pursuant to 38 U.S.C. 3702(d) there 
are two categories of lenders who may process loans automatically:
    (1) Entities such as banks, savings and loan associations, and 
mortgage and loan companies that are subject to examination by an 
agency of the United States or any State and
    (2) Lenders approved by the Department of Veterans Affairs pursuant 
to standards established by the Department of Veterans Affairs.

(Authority: 38 U.S.C. 3702(d))

    Compromise sale. A sale to a third party for an amount less than is 
sufficient to repay the unpaid balance on the loan where the holder has 
agreed in advance to release the lien in exchange for the proceeds of 
such sale.
    Condominium. Unless otherwise provided by State law, a condominium 
is a form of ownership where the buyer receives title to a three 
dimensional air space containing the individual living unit together 
with an undivided interest or share in the ownership of common 
elements.
    Cost. Cost means the entire consideration paid or payable for or on 
account of the application of materials and labor to tangible property.
    Credit package. Any information, reports or verifications used by a 
lender, holder or authorized servicing agent to determine the 
creditworthiness of an applicant for a Department of Veterans Affairs 
guaranteed loan or the assumer of such a loan.

(Authority: 38 U.S.C. 3710 and 3714)

    Date of first uncured default. Date of first uncured default means 
the due date of the earliest payment not fully satisfied by the proper 
application of available credits or deposits.

[[Page 6312]]

    Default. Default means failure of a borrower to comply with the 
terms of a loan agreement.
    Designated appraiser. Designated appraiser means a person requested 
by the Secretary to render an estimate of the reasonable value of a 
property, or of a specified type of property, within a stated area for 
the purpose of justifying the extension of credit to an eligible 
veteran for any of the purposes stated in 38 U.S.C. chapter 37. An 
appraiser on a fee basis is not an agent of the Secretary.
    Discharge or release. For purposes of basic eligibility a person 
will be considered discharged or released if the veteran was issued a 
discharge certificate under conditions other than dishonorable (38 
U.S.C. 3702(c)). The term discharge or release includes--
    (1) Retirement from the active military, naval, or air service, and
    (2) The satisfactory completion of the period of active military, 
naval, or air service for which a person was obligated at the time of 
entry into such service in the case of a person who, due to enlistment 
or reenlistment, was not awarded a discharge or release from such 
period of service at the time of such completion thereof and who, at 
such time, would otherwise have been eligible for the award of a 
discharge or release under conditions other than dishonorable.

(Authority: 38 U.S.C. 101(18))

    Dwelling. Any building designed primarily for use as a home 
consisting of not more than four family units plus an added unit for 
each veteran if more than one eligible veteran participates in the 
ownership, except that in the case of a condominium housing development 
or project within the purview of 38 U.S.C. 3710(a)(6) and Sec. Sec.  
36.4860 through 36.4865 of this part the term is limited to a one 
single-family residential unit. Also, a manufactured home, permanently 
affixed to a lot owned by a veteran and classified as real property 
under the laws of the State where it is located.

(Authority: 38 U.S.C. 3710(a) and (f))

    Economic readjustment. Economic readjustment means rearrangement of 
an eligible veteran's indebtedness in a manner calculated to enable the 
veteran to meet obligations and thereby avoid imminent loss of the 
property which secures the delinquent obligation.
    Energy conservation improvement. An improvement to an existing 
dwelling or farm residence through the installation of a solar heating 
system, a solar heating and cooling system, or a combined solar heating 
and cooling system or through application of a residential energy 
conservation measure as prescribed in 38 U.S.C. 3710(d) or by the 
Secretary.

(Authority: 38 U.S.C. 3710(a)(7))

    Full disbursement. Payment by a lender of the entire proceeds of a 
loan or the purposes described in the report of the lender in respect 
of such loan to the Secretary either:
    (1) By payment to those contracting with the borrower for such 
purposes, or
    (2) By payment to the borrower, or
    (3) By transfer to an account against which the borrower can draw 
at will, or
    (4) By transfer to an escrow account, or
    (5) By transfer to an earmarked account if
    (i) The amount is not in excess of 10 percent of the loan, or
    (ii) The loan is an Acquisition and Improvement loan pursuant to 
Sec.  36.4801, or
    (iii) The loan is one submitted by a lender of the class specified 
in 38 U.S.C. 3702(d) or 3703(a)(2).

(Authority: 38 U.S.C. 3703(c)(1))

    Graduated payment mortgage loan. A loan for the purpose of 
acquiring a single-family dwelling unit involving a plan for repayment 
in which a portion of the interest due is deferred for a period of 
time. The interest so deferred is added to the principal balance thus 
resulting in a principal amount greater than at loan origination 
(negative amortization). The monthly payments increase on an annual 
basis (graduate) for a predetermined period of time until the payments 
reach a level which will fully amortize the loan during the remaining 
loan term.

(Authority: 38 U.S.C. 3703(c) and (d))

    Guaranty. Guaranty means the obligation of the United States, 
assumed by virtue of 38 U.S.C. chapter 37, to repay a specified 
percentage of a loan upon the default of the primary debtor.
    Holder. The lender or any subsequent assignee or transferee of the 
guaranteed obligation or the authorized servicing agent (also referred 
to as ``the servicer'') of the lender or of the assignee or transferee.

(Authority: 38 U.S.C. 3714)

    Home. Home means place of residence.
    Improvements. Any alteration that improves the property for the 
purpose for which it is occupied.
    Insurance. Insurance means the obligation assumed by the United 
States to indemnify a lender to the extent specified in this subpart 
for any loss incurred upon any loan insured under 38 U.S.C. 3703(a)(2).
    Insurance account. Insurance account means the record of the amount 
available to a lender or purchaser for losses incurred on loans insured 
under 38 U.S.C. 3703(a).
    Lender. The payee or assignee or transferee of an obligation at the 
time it is guaranteed or insured. This term also includes any sole 
proprietorship, partnership, or corporation and the owners, officers 
and employees of a sole proprietorship, partnership, or corporation 
engaged in the origination, procurement, transfer, servicing, or 
funding of a loan which is guaranteed or insured by VA.

(Authority: 38 U.S.C. 3703(c)(1) and 3704(d))

    Lien. Lien means any interest in, or power over, real or personal 
property, reserved by the vendor, or created by the parties or by 
operation of law, chiefly or solely for the purpose of assuring the 
payment of the purchase price, or a debt, and irrespective of the 
identity of the party in whom title to the property is vested, 
including but not limited to mortgages, deeds with a defeasance therein 
or collaterally, deeds of trust, security deeds, mechanics' liens, 
lease-purchase contracts, conditional sales contracts, consignments.
    Liquidation sale. Any judicial, contractual or statutory 
disposition of real property, under the terms of the loan instruments 
and applicable law, to liquidate a defaulted loan that is secured by 
such property. This includes a voluntary conveyance made to avoid such 
disposition of the obligation or of the security. This term also 
includes a compromise sale.

(Authority: 38 U.S.C. 3732)

    Lot. A parcel of land acceptable to the Secretary as a manufactured 
home site.

(Authority: 38 U.S.C. 3710(a)(9))

    Manufactured home. A moveable dwelling unit designed and 
constructed for year-round occupancy by a single family, on land, 
containing permanent eating, cooking, sleeping and sanitary facilities. 
A double-wide manufactured home is a moveable dwelling designed for 
occupancy by one family and consisting of:
    (1) Two or more units intended to be joined together horizontally 
when located on a site, but capable of independent movement or
    (2) A unit having a section or sections which unfold along the 
entire length of the unit. For the purposes of this section of VA 
regulations, manufactured home/lot loans guaranteed under the purview 
of Sec. Sec.  36.4800 through 36.4893 must be for units permanently 
affixed to a lot and considered to be real property under the laws of 
the State where it is located. If the loan is for the purchase

[[Page 6313]]

of a manufactured home and lot it must be considered as one loan.

(Authority: 38 U.S.C. 3710(a)(9))

    Net loss (insured loans). Net loss on insured loans means the 
indebtedness, plus any other charges authorized under Sec.  36.4814, 
remaining unsatisfied after the liquidation of all available security 
and recourse to all intangible rights of the holder against those 
obligated on the debt.
    Net value. The fair market value of real property, minus an amount 
representing the costs that the Secretary estimates would be incurred 
by VA in acquiring and disposing of the property. The number to be 
subtracted from the fair market value will be calculated by multiplying 
the fair market value by the current cost factor. The cost factor used 
will be the most recent percentage of the fair market value that VA 
calculated and published in the Notices section of the Federal Register 
(it is intended that this percentage will be calculated annually). In 
computing this cost factor, VA will determine the average operating 
expenses and losses (or gains) on resale incurred for properties 
acquired under Sec.  36.4823 which were sold during the preceding 
fiscal year and the average administrative cost to VA associated with 
the property management activity. The final net value derived from this 
calculation will be stated as a whole dollar amount (any fractional 
amount will be rounded up to the next whole dollar). The cost items 
included in the calculation will be:
    (1) Property operating expenses. All disbursements made for payment 
of taxes, assessments, liens, property maintenance and related repairs, 
management broker's fees and commissions, and any other charges to the 
property account excluding property improvements and selling expenses.
    (2) Selling expenses. All disbursements for sales commissions plus 
any other costs incurred and paid in connection with the sale of the 
property.
    (3) Administrative costs. (i) An estimate of the total cost for VA 
of personnel (salary and benefits) and overhead (which may include 
things such as travel, transportation, communication, utilities, 
printing, supplies, equipment, insurance claims and other services) 
associated with the acquisition, management and disposition of property 
acquired under Sec.  36.4823 of this part. The average administrative 
costs will be determined by:
    (A) Dividing the total cost for VA personnel and overhead salary 
and benefits costs by the average number of properties on hand and 
adjusting this figure based on the average holding time for properties 
sold during the preceding fiscal year; and
    (B) Dividing the figure calculated in paragraph (3)(i)(A) of this 
definition by the VBA ratio of personal services costs to total 
obligations.
    (ii) The three cost averages will be added to the average loss (or 
gain) on property sold during the preceding fiscal year (based on the 
average property purchase price) and the sum will be divided by the 
average fair market value at the time of acquisition for properties 
which were sold during the preceding fiscal year to derive the 
percentage to be used in estimating net value.

(Authority: 38 U.S.C. 3732)

    Purchase price. The entire legal consideration paid or payable upon 
or on account of the sale of property, exclusive of acquisition costs, 
or for the cost of materials and labor to be applied to the property.
    Real-estate loan. Any obligation incurred for the purchase of real 
property or a leasehold estate as limited in Sec. Sec.  36.4800 through 
36.4893 or for the construction of fixtures or appurtenances thereon or 
for alterations, improvements, or repairs thereon required by 
Sec. Sec.  36.4800 through 36.4893 to be secured by a lien on such 
property or is so secured. Loans for the purpose specified in 38 U.S.C. 
3710(a)(5) (refinancing of mortgage loans or other liens on a dwelling 
or farm residence), loans for the purpose specified in 38 U.S.C. 
3710(a)(8) (refinancing of a VA guaranteed, insured or direct loan to 
lower the interest rate), loans for the purposes specified in 38 U.S.C. 
3710(a)(9) (purchase of manufactured homes/lots or the refinancing of 
such loans in order to reduce the interest rate or purchase a lot, in 
States in which manufactured homes, when permanently affixed to a lot, 
are considered real property, and loans to purchase one-family 
residential units in condominium housing developments or projects 
within the purview of 38 U.S.C. 3710(a)(6) and Sec. Sec.  36.4860 
through 36.4865 shall also be considered real estate loans.
    Reasonable value. Reasonable value means that figure which 
represents the amount a reputable and qualified appraiser, unaffected 
by personal interest, bias, or prejudice, would recommend to a 
prospective purchaser as a proper price or cost in the light of 
prevailing conditions.
    Registered mail. The term registered mail wherever used in the 
regulations concerning guaranty or insurance of loans to veterans shall 
include certified mail.
    Repairs. Any alteration of existing improved realty or equipment 
which is necessary or advisable for protective, safety or restorative 
purposes.
    Repayment plan. A repayment plan is a written executed agreement by 
and between the borrower and the holder to reinstate a loan that is 61 
or more calendar days delinquent, by requiring the borrower to pay each 
month over a fixed period (minimum of three months duration) the normal 
monthly payments plus an agreed upon portion of the delinquency each 
month.
    Repossession. Repossession means recovery or acquisition of such 
physical control of property (pursuant to the provisions of the 
security instrument or as otherwise provided by law) as to make further 
legal or other action unnecessary in order to obtain actual possession 
of the property or to dispose of the same by sale or otherwise.
    Residential property.
    (1) Any one-family residential unit in a condominium housing 
development within the purview of 38 U.S.C. 3710(a)(6) and Sec. Sec.  
36.4860 through 36.4865;
    (2) Any manufactured home permanently affixed to a lot owned or 
being purchased by a veteran and considered to be real property under 
the laws of the State where it is located;
    (3) Any improved real property (other than a condominium housing 
development or a manufactured home and/or lot) or leasehold estate 
therein as limited by this subpart, the primary use of which is for 
occupancy as a home, consisting of not more than four family units, 
plus an added unit for each eligible veteran if more than one 
participates in the ownership thereof; or
    (4) Any land to be purchased out of the proceeds of a loan for the 
construction of a dwelling, and on which such dwelling is to be 
erected.

(Authority: 38 U.S.C. 3703(c)(1) and 3710(a))

    Secretary. The Secretary of Veterans Affairs, or any employee of 
the Department of Veterans Affairs authorized to act in the Secretary's 
stead.
    Servicer. The authorized servicer is either:
    (1) The servicing agent of a holder; or
    (2) The holder itself, if the holder is performing all servicing 
functions on a loan. The servicer is typically the entity reporting all 
loan activity to VA and filing claims under the guaranty on behalf of 
the holder. VA will generally issue guaranty claims and other payments 
to the servicer, who will be responsible for forwarding funds to the

[[Page 6314]]

holder in accordance with its servicing agreement. Incentives under 
Sec.  36.4819 will generally be paid directly to the servicer based on 
its performance under that section and in accordance with its tier 
ranking under Sec.  36.4818.
    Servicing agent. An agent designated by the loan holder as the 
entity to collect installments on the loan and/or perform other 
functions as necessary to protect the interests of the holder.

(Authority: 38 U.S.C. 3714)

    Special forbearance. This is a written agreement executed by and 
between the holder and the borrower where the holder agrees to suspend 
all payments or accept reduced payments for one or more months, on a 
loan 61 or more calendar days delinquent, and the borrower agrees to 
pay the total delinquency at the end of the specified period or enter 
into a repayment plan.
    Total indebtedness: For purposes of 38 U.S.C. 3732(c), the 
veteran's ``total indebtedness'' shall be the sum of: the unpaid 
principal on the loan as of the date of the liquidation sale, accrued 
unpaid interest permitted by Sec.  36.4824(a) of this part, and 
allowable advances/other charges permitted to be included in the 
guaranty claim by Sec.  36.4814 of this part.

(Authority: 38 U.S.C. 3703(c)(1))

Sec.  36.4802  Computation of guaranties or insurance credits.

    (a) With respect to a loan to a veteran guaranteed under 38 U.S.C. 
3710 the guaranty shall not exceed the lesser of the dollar amount of 
entitlement available to the veteran or--
    (1) 50 percent of the original principal loan amount where the loan 
amount is not more than $45,000; or
    (2) $22,500 where the original principal loan exceeds $45,000, but 
is not more than $56,250; or
    (3) Except as provided in paragraph (a)(4) of this section, the 
lesser of $36,000 or 40 percent of the original principal loan amount 
where the loan amount exceeds $56,250; or
    (4) The lesser of $60,000 or 25 percent of the original principal 
loan amount where the loan amount exceeds $144,000 and the loan is for 
the purchase or construction of a home or the purchase of a condominium 
unit.
    (b) With respect to an interest rate reduction refinancing loan 
guaranteed under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11), the 
dollar amount of guaranty may not exceed the greater of the original 
guaranty amount of the loan being refinanced, or 25 percent of the 
refinancing loan amount.

(Authority: 38 U.S.C. 3703, 3710)

    (c) With respect to a loan for an energy efficient mortgage 
guaranteed under 38 U.S.C. 3710(d), the amount of the guaranty shall be 
in the same proportion as would have been provided if the energy 
efficient improvements were not added to the loan amount, and there 
shall be no additional charge to the veteran's entitlement as a result 
of the increased guaranty amount.

(Authority: 38 U.S.C. 3703, 3710)

    (d) An amount equal to 15 percent of the original principal amount 
of each insured loan shall be credited to the insurance account of the 
lender and shall be charged against the guaranty entitlement of the 
borrower: Provided, That no loan may be insured unless the borrower has 
sufficient entitlement remaining to permit such credit.
    (e) Subject to the provisions of Sec.  36.4803(g), the following 
formulas shall govern the computation of the amount of the guaranty or 
insurance entitlement which remains available to an eligible veteran 
after prior use of entitlement:
    (1) If a veteran previously secured a nonrealty (business) loan, 
the amount of nonrealty entitlement used is doubled and subtracted from 
$36,000. The sum remaining is the amount of available entitlement for 
use, except that:
    (i) Entitlement may be increased by up to $24,000 if the loan 
amount exceeds $144,000 and the loan is for purchase or construction of 
a home or purchase of a condominium; and
    (ii) Entitlement for manufactured home loans that are to be 
guaranteed under 38 U.S.C. 3712 may not exceed $20,000.
    (2) If a veteran previously secured a realty (home) loan, the 
amount of realty (home) loan entitlement used is subtracted from 
$36,000. The sum remaining is the amount of available entitlement for 
use, except that:
    (i) Entitlement may be increased by up to $24,000 if the loan 
amount exceeds $144,000 and the loan is for purchase or construction of 
a home or purchase of a condominium; and
    (ii) Entitlement for manufactured home loans that are to be 
guaranteed under 38 U.S.C. 3712 may not exceed $20,000.
    (3) If a veteran previously secured a manufactured home loan under 
38 U.S.C. 3712, the amount of entitlement used for that loan is 
subtracted from $36,000. The sum remaining is the amount of available 
entitlement for home loans and the sum remaining may be increased by up 
to $24,000 if the loan amount exceeds $144,000 and the loan is for 
purchase or construction of a home or purchase of a condominium. To 
determine the amount of entitlement available for manufactured home 
loans processed under 38 U.S.C. 3712, the amount of entitlement 
previously used for that purpose is subtracted from $20,000. The sum 
remaining is the amount of available entitlement for use for 
manufactured home loan purposes under 38 U.S.C. 3712.

(Authority: 38 U.S.C. 3703)

    (f) For the purpose of computing the remaining guaranty or 
insurance benefit to which a veteran is entitled, loans guaranteed 
prior to February 1, 2008 shall be taken into consideration as if made 
subsequent thereto.
    (g) A loan eligible for insurance may be either guaranteed or 
insured at the option of the borrower and the lender, provided that if 
the Secretary is not advised of the exercise of such option at the time 
the loan is reported pursuant to Sec.  36.4803, such loan will not be 
eligible for insurance.
    (h) A guaranty is reduced or increased pro rata with any deduction 
or increase in the amount of the guaranteed indebtedness, but in no 
event will the amount payable on a guaranty exceed the amount of the 
original guaranty, except where the guaranty has been increased under 
Sec.  36.4815, or the percentage of the total indebtedness 
corresponding to that of the original guaranty whichever is less. 
However, on a graduated payment mortgage loan, the percentage of 
guaranty applicable to the original loan amount pursuant to paragraph 
(a) of this section shall apply to the loan indebtedness to the extent 
scheduled deferred interest is added to principal during the graduation 
period without regard to the original maximum dollar amount of 
guaranty.

(Authority: 38 U.S.C. 3703(b) and (d))

    (i) The amount of any guaranty or the amount credited to a lender's 
insurance account in relation to any insured loan shall be charged 
against the original or remainder of the guaranty benefit of the 
borrower. Complete or partial liquidation, by payment or otherwise, of 
the veteran's guaranteed or insured indebtedness does not increase the 
remainder of the guaranty benefit, if any, otherwise available to the 
veteran. When the maximum amount of guaranty or insurance legally 
available to a veteran shall have been granted, no further guaranty or 
insurance is available to the veteran.
    (j) Notwithstanding the provisions of paragraph (i) of this 
section, in computing the aggregate amount of guaranty or insurance 
housing loan entitlement available to a veteran under

[[Page 6315]]

this chapter, the Secretary may exclude the amount of guaranty or 
insurance housing loan entitlement used for any guaranteed, insured, or 
direct loan under any one of the following circumstances:
    (1)(i) The property which secured the loan has been disposed of by 
the veteran or has been destroyed by fire or other natural hazard; and
    (ii) The loan has been repaid in full; or, the Secretary has been 
released from liability as to the loan; or, if the Secretary has 
suffered a loss on such loan, the loss has been paid in full.
    (2) A veteran-transferee has agreed to assume the outstanding 
balance on the loan and consented to the use of the veteran-
transferee's entitlement, to the extent that the entitlement of the 
veteran-transferor had been used originally, in place of the veteran-
transferor's for the guaranteed, insured, or direct loan, and the 
veteran-transferee otherwise meets the requirements of this chapter.
    (3)(i) The loan has been repaid in full; and
    (ii) The loan for which the veteran seeks to use entitlement under 
this chapter is secured by the same property which secured the loan 
referred to in the preceding paragraph (j)(3)(i) of this paragraph.
    (4) In a case not covered by (j)(1) or (j)(2) of this section, the 
Secretary may, one time per veteran, exclude entitlement used if:
    (i) The loan has been repaid in full and, if the Secretary has 
suffered a loss on the loan, the loss has been paid in full; or
    (ii) The Secretary has been released from liability as to the loan 
and, if the Secretary has suffered a loss on the loan, the loss has 
been paid in full.
    (k) The Secretary may, in any case involving circumstances that the 
Secretary deems appropriate, waive one or more of the requirements set 
forth in paragraph (j)(1) of this section.

(Authority: 38 U.S.C. 3702(b), 3710)

    (l)(1) The amount of guaranty entitlement, available and unused, of 
an eligible unmarried surviving spouse (whose eligibility does not 
result from his or her own service) is determinable in the same manner 
as in the case of any veteran, and any entitlement which the decedent 
(who was his or her spouse) used shall be disregarded. A certificate as 
to the eligibility of such surviving spouse, issued by the Secretary, 
shall be a condition precedent to the guaranty or insurance of any loan 
made to a surviving spouse in such capacity.

(Authority: 38 U.S.C. 3701(a))

    (2) An unmarried surviving spouse who was a co-obligor under an 
existing VA guaranteed, insured or direct loan shall be considered to 
be a veteran eligible for an interest rate reduction refinancing loan 
pursuant to 38 U.S.C. 3710(a)(8) or (9)(B)(i).

(Authority: 38 U.S.C. 3710(e)(3), 3703(c)(1))

Sec.  36.4803  Reporting requirements.

    (a) With respect to loans automatically guaranteed under 38 U.S.C. 
3703(a)(1), evidence of the guaranty will be issuable to a lender of a 
class described under 38 U.S.C. 3702(d) if the loan is reported to the 
Secretary not later than 60 days following full disbursement and upon 
the certification of the lender that:
    (1) No default exists thereunder that has continued for more than 
30 days;
    (2) Except for acquisition and improvement loans as defined in 
Sec.  36.4801, any construction, repairs, alterations, or improvements 
effected subsequent to the appraisal of reasonable value, and paid for 
out of the proceeds of the loan, which have not been inspected and 
approved upon completion by a compliance inspector designated by the 
Secretary, have been completed properly in full accordance with the 
plans and specifications upon which the original appraisal was based; 
and any deviations or changes of identity in said property have been 
approved as required in Sec.  36.4804 concerning guaranty or insurance 
of loans to veterans;
    (3) The loan conforms otherwise with the applicable provisions of 
38 U.S.C. chapter 37 and of the regulations concerning guaranty or 
insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

    (b) Loans made pursuant to 38 U.S.C. 3703(a), although not entitled 
to automatic insurance thereunder, may, when made by a lender of a 
class described in 38 U.S.C. 3702(d)(1), be reported for issuance of an 
insurance credit.

(Authority: 38 U.S.C. 3702(d), 3703(a)(2))

    (c) Each loan proposed to be made to an eligible veteran by a 
lender not within a class described in 38 U.S.C. 3702(d) shall be 
submitted to the Secretary for approval prior to closing. Lenders 
described in 38 U.S.C. 3702(d) shall have the optional right to submit 
any loan for such prior approval. The Secretary, upon determining any 
loan so submitted to be eligible for a guaranty, or for insurance, will 
issue a certificate of commitment with respect thereto.
    (d) A certificate of commitment shall entitle the holder to the 
issuance of the evidence of guaranty or insurance upon the ultimate 
actual payment of the full proceeds of the loan for the purposes 
described in the original report and upon the submission within 60 days 
thereafter of a supplemental report showing that fact and:
    (1) The identity of any property purchased therewith,
    (2) That all property purchased or acquired with the proceeds of 
the loan has been encumbered as required by the regulations concerning 
guaranty or insurance of loans to veterans,
    (3) Except for acquisition and improvement loans as defined in 
Sec.  36.4801(c), any construction, repairs, alterations, or 
improvements paid for out of the proceeds of the loan, which have not 
been inspected and approved subsequent to completion by a compliance 
inspector designated by the Secretary, have been completed properly in 
full accordance with the plans and specifications upon which the 
original appraisal was based; and that any deviations or changes of 
identity in said property have been approved as required by Sec.  
36.4804, and
    (4) That the loan conforms otherwise with the applicable provisions 
of 38 U.S.C. chapter 37 and the regulations concerning guaranty or 
insurance of loans to veterans.

(Authority: 38 U.S.C. 3703(c)(1))

    (e) Upon the failure of the lender to report in accordance with the 
provisions of paragraph (d) of this section, the certificate of 
commitment shall have no further effect, or the amount of guaranty or 
insurance shall be reduced pro rata, as may be appropriate under the 
facts of the case: Provided, nevertheless, that if the loan otherwise 
meets the requirements of this section, said certificate of commitment 
may be given effect by the Secretary, notwithstanding the report is 
received after the date otherwise required.
    (f) For loans not reported within 60 days, evidence of guaranty 
will be issued only if the loan report is accompanied by a statement 
signed by a corporate officer of the lending institution which explains 
why the loan was reported late. The statement must identify the case or 
cases in issue and must set forth the specific reason or reasons why 
the loan was not submitted on time. Upon receipt of such a statement 
evidence of guaranty will be issued. A pattern of late reporting and 
the reasons therefore will be considered by VA in taking action under 
Sec.  36.4853.
    (g) Evidence of a guaranty will be issued by the Secretary by 
appropriate endorsement on the note or other instrument evidencing the 
obligation, or

[[Page 6316]]

by a separate certificate at the option of the lender. Notice of credit 
to an insurance account will be given to the lender. Unused 
certificates of eligibility issued prior to March 1, 1946, are void. No 
certificate of commitment shall be issued and no loan shall be 
guaranteed or insured unless the lender, the veteran, and the loan are 
shown to be eligible. Evidence of guaranty or insurance will not be 
issued on any loan for the purchase or construction of residential 
property unless the veteran, or the veteran's spouse in the case of a 
veteran who cannot occupy the property because of active duty status 
with the Armed Forces, certifies in such form as the Secretary shall 
prescribe that the veteran, or spouse of the active duty veteran, 
intends to occupy the property as his or her home. Guaranty or 
insurance evidence will not be issued on any loan for the alteration, 
improvement, or repair of any residential property or on a refinancing 
loan unless the veteran, or spouse of an active duty servicemember, 
certifies that he or she presently occupies the property as his or her 
home. An exception to this is if the home improvement or refinancing 
loan is for extensive changes to the property that will prevent the 
veteran or the spouse of the active duty veteran from occupying the 
property while the work is being completed. In such a case the veteran 
or spouse of the active duty veteran must certify that he or she 
intends to occupy or reoccupy the property as his or her home upon 
completion of the substantial improvements or repairs. All of the 
mentioned certifications must take place at the time of loan 
application and closing except in the case of loans automatically 
guaranteed, in which case veterans or, in the case of an active duty 
veteran, the veteran's spouse shall make the required certification 
only at the time the loan is closed.

(Authority: 38 U.S.C. 3704(c))

    (h) Subject to compliance with the regulations concerning guaranty 
or insurance of loans to veterans, the certificate of guaranty or the 
evidence of insurance credit will be issuable within the available 
entitlement of the veteran on the basis of the loan stated in the final 
loan report or certification of loan disbursement, except for 
refinancing loans for interest rate reductions. The available 
entitlement of a veteran will be determined by the Secretary as of the 
date of receipt of an application for guaranty or insurance of a loan 
or of a loan report. Such date of receipt shall be the date the 
application or loan report is date-stamped into VA. Eligibility derived 
from the most recent period of service:
    (1) Shall cancel any unused entitlement derived from any earlier 
period of service, and
    (2) Shall be reduced by the amount by which entitlement from 
service during any earlier period has been used to obtain a direct, 
guaranteed, or insured loan:
    (i) On property which the veteran owns at the time of application, 
or
    (ii) As to which the Secretary has incurred actual liability or 
loss, unless in the event of loss or the incurrence and payment of such 
liability by the Secretary, the resulting indebtedness of the veteran 
to the United States has been paid in full. Provided, that if the 
Secretary issues or has issued a certificate of commitment covering the 
loan described in the application for guaranty or insurance or in the 
loan report, the amount and percentage of guaranty or the amount of the 
insurance credit contemplated by the certificate of commitment shall 
not be subject to reduction if the loan has been or is closed on a date 
that is not later than the expiration date of the certificate of 
commitment, notwithstanding that the Secretary in the meantime and 
prior to the issuance of the evidence of guaranty or insurance shall 
have incurred actual liability or loss on a direct, guaranteed, or 
insured loan previously obtained by the borrower. For the purposes of 
this paragraph, the Secretary will be deemed to have incurred actual 
loss on a guaranteed or insured loan if the Secretary has paid a 
guaranty or insurance claim thereon and the veteran's resultant 
indebtedness to the Government has not been paid in full, and to have 
incurred actual liability on a guaranteed or insured loan if the 
Secretary is in receipt of a claim on the guaranty or insurance or is 
in receipt of a notice of default. In the case of a direct loan, the 
Secretary will be deemed to have incurred an actual loss if the loan is 
in default. A loan, the proceeds of which are to be disbursed 
progressively or at intervals, will be deemed to have been closed for 
the purposes of this paragraph if the loan has been completed in all 
respects excepting the actual ``payout'' of the entire loan proceeds.

(Authority: 38 U.S.C. 3702(a), 3710(c))

    (i) Any amounts that are disbursed for an ineligible purpose shall 
be excluded in computing the amount of guaranty or insurance credit.
    (j) Notwithstanding the lender has erroneously, but without intent 
to misrepresent, made certification with respect to paragraph (a)(1) of 
this section, the guaranty or insurance will become effective upon the 
curing of such default and its continuing current for a period of not 
less than 60 days thereafter. For the purpose of this paragraph a loan 
will be deemed current so long as the installment is received within 30 
days after its due date.
    (k) No guaranty or insurance commitment or evidence of guaranty or 
insurance will be issuable in respect to any loan to finance a contract 
that:
    (1) Is for the purchase, construction, repair, alteration, or 
improvement of a dwelling or farm residence;
    (2) Is dated on or after June 4, 1969;
    (3) Provides for a purchase price or cost to the veteran in excess 
of the reasonable value established by the Secretary; and
    (4) Was signed by the veteran prior to the veteran's receipt of 
notice of such reasonable value; unless such contract includes, or is 
amended to include, a provision that reads substantially as follows:

    It is expressly agreed that, notwithstanding any other 
provisions of this contract, the purchaser shall not incur any 
penalty by forfeiture of earnest money or otherwise be obligated to 
complete the purchase of the property described herein, if the 
contract purchase price or cost exceeds the reasonable value of the 
property established by the Department of Veterans Affairs. The 
purchaser shall, however, have the privilege and option of 
proceeding with the consummation of this contract without regard to 
the amount of the reasonable value established by the Department of 
Veterans Affairs.

(Authority: 38 U.S.C. 501, 3703(c)(1))

    (l) With respect to any loan for which a commitment was made on or 
after March 1, 1988, the Secretary must be notified whenever the holder 
receives knowledge of disposition of the residential property securing 
a VA-guaranteed loan.
    (1) If the seller applies for prior approval of the assumption of 
the loan, then:
    (i) A holder (or its authorized servicing agent) who is an 
automatic lender must examine the creditworthiness of the purchaser and 
determine compliance with the provisions of 38 U.S.C. 3714. The 
creditworthiness review must be performed by the party that has 
automatic authority. If both the holder and its servicing agent are 
automatic lenders, then they must decide between themselves which one 
will make the determination of creditworthiness, whether the loan is 
current and whether there is a contractual obligation to assume the 
loan, as required by 38 U.S.C. 3714. If the actual loan holder

[[Page 6317]]

does not have automatic authority and its servicing agent is an 
automatic lender, then the servicing agent must make the determinations 
required by 38 U.S.C. 3714 on behalf of the holder. The actual holder 
will remain ultimately responsible for any failure of its servicing 
agent to comply with the applicable law and VA regulations.
    (A) If the assumption is approved and the transfer of the security 
is completed, then the notice required by this paragraph (l) shall 
consist of the credit package (unless previously provided in accordance 
with paragraph (l)(1)(i)(B) of this section) and a copy of the executed 
deed and/or assumption agreement as required by VA office of 
jurisdiction. The notice shall be submitted to the Department with the 
VA receipt for the funding fee provided for in Sec.  36.4813(e)(2).
    (B) If the application for assumption is disapproved, the holder 
shall notify the seller and the purchaser that the decision may be 
appealed to the VA office of jurisdiction within 30 days. The holder 
shall make available to that VA office all items used by the holder in 
making the holder's decision in case the decision is appealed to VA. If 
the application remains disapproved after 60 days (to allow time for 
appeal to and review by VA), then the holder must refund $50 of any fee 
previously collected under the provisions of Sec.  36.4813(d)(8). If 
the application is subsequently approved and the sale is completed, 
then the holder (or its authorized servicing agent) shall provide the 
notice described in paragraph (l)(1)(i)(A) of this section.
    (C) In performing the requirements of paragraphs (l)(1)(i)(A) or 
(l)(1)(i)(B) of this section, the holder must complete its examination 
of the creditworthiness of the prospective purchaser and advise the 
seller no later than 45 days after the date of receipt by the holder of 
a complete application package for the approval of the assumption. The 
45-day period may be extended by an interval not to exceed the time 
caused by delays in processing of the application that are documented 
as beyond the control of the holder, such as employers or depositories 
not responding to requests for verifications, which were timely 
forwarded, or follow-ups on those requests.
    (ii) If neither the holder nor its authorized servicing agent is an 
automatic lender, the notice to VA shall include:
    (A) Advice regarding whether the loan is current or in default;
    (B) A copy of the purchase contract; and
    (C) A complete credit package developed by the holder which the 
Secretary may use for determining the creditworthiness of the 
purchaser.
    (D) The notice and documents required by this section must be 
submitted to the VA office of jurisdiction no later than 35 days after 
the date of receipt by the holder of a complete application package for 
the approval of the assumption, subject to the same extensions as 
provided in paragraph (l)(l)(i) of this section. If the assumption is 
not automatically approved by the holder or its authorized agent, 
pursuant to the automatic authority provisions, $50 of any fee 
collected in accordance with Sec.  36.4813(d)(8) must be refunded. If 
the Department of Veterans Affairs does not approve the assumption, the 
holder will be notified and an additional $50 of any fee collected 
under Sec.  36.4813(d)(8) must be refunded following the expiration of 
the 30-day appeal period set out in paragraph (l)(l)(i)(B) of this 
section. If such an appeal is made to the Department of Veterans 
Affairs, then the review will be conducted at the Department of 
Veterans Affairs office of jurisdiction by an individual who was not 
involved in the original disapproval decision. If the application for 
assumption is approved and the transfer of security is completed, then 
the holder (or its authorized servicing agent) shall provide the notice 
required in paragraph (l)(l)(i)(A) of this section.
    (2) If the seller fails to notify the holder before disposing of 
property securing the loan, the holder shall notify the Secretary 
within 60 days after learning of the transfer. Such notice shall advise 
whether or not the holder intends to exercise its option to immediately 
accelerate the loan and whether or not an opportunity will be extended 
to the transferor and transferee to apply for retroactive approval of 
the assumption under the terms of this paragraph (l).

(Authority: 38 U.S.C. 3714)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0516.)


Sec.  36.4804  Deviations; changes of identity.

    A deviation of more than 5 percent between the estimates upon which 
a certificate of commitment has been issued and the report of final 
payment of the proceeds of the loan, or a change in the identity of the 
property upon which the original appraisal was based, will invalidate 
the certificate of commitment unless such deviation or change be 
approved by the Secretary. Any deviation in excess of 5 percent or 
change in the identity of the property upon which the original 
appraisal was based must be supported by a new or supplemental 
appraisal of reasonable value: Provided, That substitution of materials 
of equal or better quality and value approved by the veteran and the 
designated appraiser shall not be deemed a ``change in the identity of 
the property'' within the purview of this section. A deviation not in 
excess of 5 percent will not require the prior approval of the 
Secretary.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4805  Partial disbursement.

    In cases where intervening circumstances make it impracticable to 
complete the actual paying out of the loan originally proposed, or 
justify the lender in declining to make further disbursements on a 
construction loan, evidence of guaranty or of insurance of the loan or 
the proper pro rata part thereof will be issuable if the loan is 
otherwise eligible for automatic guaranty or a certificate of 
commitment was issued thereon: Provided,
    (a) A report of the loan is submitted to the Secretary within a 
reasonable time subsequent to the last disbursement, but in no event 
more than 90 days thereafter, unless report of the facts and 
circumstances is made and an extension of time obtained from the 
Secretary.
    (b) There has been no default on the loan, except that the 
existence of a default shall not preclude issuance of a guaranty 
certificate or insurance advice if a certificate of commitment was 
issued with respect to the loan.
    (c) The Secretary determines that a person of reasonable prudence 
similarly situated would not make further disbursements in the 
situation presented.
    (d) There has been full compliance with the provisions of 38 U.S.C. 
chapter 37 and of the applicable regulations up to the time of the last 
disbursement.
    (e) In the case of a construction loan when the construction is not 
fully completed, the amount and percentage of the guaranty and the 
amount of the loan for the purposes of insurance or accounting to the 
Secretary shall be based upon such portion of the amount disbursed out 
of the proceeds of the loan which, when added to any other payments 
made by or on behalf of the veteran to the builder or the contractor, 
does not exceed 80 percent of the value of that portion of the 
construction performed (basing value on the contract price) plus the 
sum, if any, disbursed by the lender out of the proceeds of the loan 
for the land on which the construction is situated: And provided

[[Page 6318]]

further, That the lender shall certify as follows:
    (1) Any amount advanced for land is protected by title or lien as 
provided in the regulations concerning guaranty or insurance of loans 
to veterans; and
    (2) No enforceable liens, for any work done or material furnished 
for that part of the construction completed and for which payment has 
been made out of the proceeds of the loan, exist or can come into 
existence.

(Authority: 38 U.S.C. 3703(c)(1) and (d))


Sec.  36.4806  Refinancing of mortgage or other lien indebtedness.

    (a) Any loan for the purpose of refinancing (38 U.S.C. 3710(a)(5)) 
an existing mortgage loan or other indebtedness secured by a lien of 
record on a dwelling or farm residence owned and occupied or to be 
reoccupied if the refinancing loan is for the completion of major 
alterations, repairs or improvements to the property, by an eligible 
veteran as the veteran's home, or in the case of an eligible veteran 
unable to occupy the property because of active duty status in the 
Armed Forces, occupied or to be reoccupied by the veteran's spouse as 
the spouse's home, shall be eligible for guaranty in an amount as 
computed under Sec.  36.4802(a) provided that--
    (1) The amount of the loan may not exceed an amount equal to 90 
percent of the reasonable value of the dwelling or farm residence which 
will secure the loan, as determined by the Secretary.

(Authority: 38 U.S.C. 3710(e)(1))

    (2) The dollar amount of discount, if any, to be paid by the 
veteran is reasonable in amount as determined by the Secretary in 
accordance with Sec.  36.4813(d)(7)(i),
    (3) The loan is otherwise eligible for guaranty.
    (b) [Reserved]
    (c) Nothing shall preclude guaranty of a loan to an eligible 
veteran having home loan guaranty entitlement to refinance under the 
provisions of 38 U.S.C. 3710(a)(5) a VA guaranteed or insured (or 
direct) mortgage loan made to him or her which is outstanding on the 
dwelling or farm residence owned and occupied or to be reoccupied after 
the completion of major alterations, repairs, or improvements to the 
property, by the veteran as a home, or in the case of an eligible 
veteran unable to occupy the property because of active duty status in 
the Armed Forces, occupied or to be reoccupied by the veteran's spouse 
as the spouse's home.

(Authority: 38 U.S.C. 3710(e)(1))

    (d) A refinancing loan may include contractual prepayment 
penalties, if any, due the holder of the mortgage or other lien 
indebtedness to be refinanced.
    (e) [Reserved]
    (f) Nothing in this section shall preclude the refinancing of the 
balance due for the purchase of land on which new construction is to be 
financed through the proceeds of the loan, or the refinancing of the 
balance due on an existing land sale contract relating to a veteran's 
dwelling or farm residence.
    (g) A veteran may refinance (38 U.S.C. 3710(a)(9)(B)(ii)) an 
existing loan that was for the purchase of, and is secured by, a 
manufactured home in order to purchase the lot on which the 
manufactured home is or will be permanently affixed, provided the 
following requirements are met:
    (1) The refinancing of a manufactured home and the purchase of a 
lot must be considered as one loan;
    (2) The manufactured home upon being permanently affixed to the lot 
will be considered real property under the laws of the State where it 
is located;
    (3) The loan must be secured by the same manufactured home which is 
being refinanced and the real property on which the manufactured home 
is or will be located;
    (4) The amount of the loan may not exceed an amount equal to the 
sum of the balance of the loan being refinanced; the purchase price, 
not to exceed the reasonable value of the lot; the costs of the 
necessary site preparation of the lot as determined by the Secretary; a 
reasonable discount as authorized in Sec.  36.4813(d)(6) with respect 
to that portion of the loan used to refinance the existing purchase 
money lien on the manufactured home, and closing costs as authorized in 
Sec.  36.4813; and
    (5) If the loan being refinanced was guaranteed by VA, the portion 
of the loan made for the purpose of refinancing an existing purchase 
money manufactured home loan may be, guaranteed without regard to the 
outstanding guaranty entitlement available for use by the veteran, and 
the veteran's guaranty entitlement shall not be charged as a result of 
any guaranty provided for the refinancing portion of the loan. For the 
purposes enumerated in 38 U.S.C. 3702(b), the refinancing portion of 
the loan shall be considered to have been obtained with the guaranty 
entitlement used to obtain VA-guaranteed loan being refinanced. The 
total guaranty for the new loan shall be the sum of the guaranty 
entitlement used to obtain VA-guaranteed loan being refinanced and any 
additional guaranty entitlement available to the veteran. However, the 
total guaranty may not exceed the guaranty amount as calculated under 
Sec.  36.4802(a).

(Authority: 38 U.S.C. 3703(a), 3710)


Sec.  36.4807  Interest rate reduction refinancing loan.

    (a) Pursuant to 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), a 
veteran may refinance an existing VA guaranteed, insured, or direct 
loan to reduce the interest rate payable on the existing loan provided 
that all of the following requirements are met:
    (1) The new loan must be secured by the same dwelling or farm 
residence as the loan being refinanced.
    (2) The veteran owns the dwelling or farm residence securing the 
loan and
    (i) Occupies the dwelling or residence as his or her home; or
    (ii) Previously occupied the dwelling or residence as his or her 
home and certifies, in such form as the Secretary shall require, that 
he or she has previously occupied the dwelling or residence as a home; 
or
    (iii) In a case in which the veteran is or was unable to occupy the 
residence or dwelling as a home because the veteran was on active duty 
status as a member of the Armed Forces, the spouse of the veteran 
occupies, or previously occupied, the dwelling or residence as the 
spouse's home and certifies to that occupancy in such form as the 
Secretary shall require.

(Authority: 38 U.S.C. 3710(e)(1))

    (3) The monthly principal and interest payment on the new loan is 
lower than the principal and interest payment on the loan being 
refinanced; or the term of the new loan is shorter than the term of the 
loan being refinanced; or the new loan is a fixed-rate loan that 
refinances a VA-guaranteed adjustable rate mortgage; or the increase in 
the monthly payments on the loan results from the inclusion of energy 
efficient improvements, as provided by Sec.  36.4839(a)(4); or the 
Secretary approves the loan in advance after determining that the new 
loan is necessary to prevent imminent foreclosure and the veteran 
qualifies for the new loan under the credit standards contained in 
Sec.  36.4840.
    (4) The amount of the refinancing loan does not exceed:
    (i) An amount equal to the balance of the loan being refinanced, 
which is not delinquent, except as provided in paragraph (a)(5) of this 
section, plus closing costs authorized by Sec.  36.4813(d) and a 
discount not to exceed 2 percent of the loan amount; or
    (ii) In the case of a loan to refinance an existing VA-guaranteed 
or direct loan and to improve the dwelling securing

[[Page 6319]]

such loan through energy efficient improvements, the amount referred to 
with respect to the loan under paragraph (a)(4)(i) of this section, 
plus the amount authorized by Sec.  36.4839(a)(4).

(Authority: 38 U.S.C. 3703, 3710)

    (5) If the loan being refinanced is delinquent (delinquent means 
that a scheduled monthly payment of principal and interest is more than 
30 days past due), the new loan will be guaranteed only if the 
Secretary approves it in advance after determining that the borrower, 
through the lender, has provided reasons for the loan deficiency, has 
provided information to establish that the cause of the delinquency has 
been corrected, and qualifies for the loan under the credit standards 
contained in Sec.  36.4840. In such cases, the term ``balance of the 
loan being refinanced'' shall include any past due installments, plus 
allowable late charges.
    (6) The dollar amount of guaranty on the 38 U.S.C. 3710(a)(8) or 
(a)(9)(B)(i) loan does not exceed the greater of the original guaranty 
amount of the loan being refinanced or 25 percent of the new loan.
    (7) The term of the refinancing loan (38 U.S.C. 3710(a)(8)) may not 
exceed the original term of the loan being refinanced plus ten years, 
or the maximum loan term allowed under 38 U.S.C. 3703(d)(1), whichever 
is less. For manufactured home loans that were previously guaranteed 
under 38 U.S.C. 3712, the loan term, if being refinanced under 38 
U.S.C. 3710(a)(9)(B)(i), may exceed the original term of the loan but 
may not exceed the maximum loan term allowed under 38 U.S.C. 
3703(d)(1).

(Authority: 38 U.S.C. 3703(c)(1), 3710(e)(1))

    (b) Notwithstanding any other regulatory provision, the interest 
rate reduction refinancing loan may be guaranteed without regard to the 
amount of guaranty entitlement available for use by the veteran, and 
the amount of the veteran's remaining guaranty entitlement, if any, 
shall not be charged for an interest rate reduction refinancing loan. 
The interest rate reduction refinancing loan will be guaranteed with 
the lesser of the entitlement used by the veteran to obtain the loan 
being refinanced or the amount of the guaranty as calculated under 
Sec.  36.4802(a). The veteran's loan guaranty entitlement originally 
used for a purpose as enumerated in 38 U.S.C. 3710(a)(1) through (7) 
and (a)(9)(A)(i) and (ii) and subsequently transferred to an interest 
rate reduction refinancing loan (38 U.S.C. 3710(a)(8) or (a)(9)(B)(i)) 
shall be eligible for restoration when the interest rate reduction 
refinancing loan or subsequent interest rate reduction refinancing 
loans on the same property meets the requirements of Sec.  36.4802(h).

(Authority: 38 U.S.C. 3703(a))

    (c) Title to the estate which is refinanced for the purpose of an 
interest rate reduction must be in conformity with Sec.  36.4854.

(Authority: 38 U.S.C. 3710(a)(8), (a)(9)(B)(i) and (e))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0601.)


Sec.  36.4808  Joint loans.

    (a) Except as provided in paragraph (b) of this section, the prior 
approval of the Secretary is required in respect to any loan to be made 
to two or more borrowers who become jointly and severally liable, or 
jointly liable therefor, and who will acquire an undivided interest in 
the property to be purchased or who will otherwise share in the 
proceeds of the loan, or in respect to any loan to be made to an 
eligible veteran whose interest in the property owned, or to be 
acquired with the loan proceeds, is an undivided interest only, unless 
such interest is at least a 50 percent interest in a partnership. The 
amount of the guaranty or insurance credit shall be computed in such 
cases only on that portion of the loan allocable to the eligible 
veteran which, taking into consideration all relevant factors, 
represents the proper contribution of the veteran to the transaction. 
Such loans shall be secured to the extent required by 38 U.S.C. chapter 
37 and the regulations concerning guaranty or insurance of loans to 
veterans.
    (b) Notwithstanding the provisions of paragraph (a) of this 
section, the joinder of the spouse of a veteran-borrower in the 
ownership of residential property shall not require prior approval or 
preclude the issuance of a guaranty or insurance credit based upon the 
entire amount of the loan. If both spouses be eligible veterans, either 
or both may, within permissible maxima, utilize available guaranty or 
insurance entitlement.
    (c) For the purpose of determining the rights and the liabilities 
of the Secretary with respect to a loan subject to paragraph (a) of 
this section, credits legally applicable to the entire loan shall be 
applied as follows:
    (1) Prepayments made expressly for credit to that portion of the 
indebtedness allocable to the veteran (including the gratuity paid 
pursuant to former provisions of law), shall be applied to such portion 
of the indebtedness. All other payments shall be applied ratably to 
those portions of the loan allocable respectively to the veteran and to 
the other debtors.
    (2) Proceeds of the sale or other liquidation of the security shall 
be applied ratably to the respective portions of the loan, such portion 
of the proceeds as represents the interest of the veteran being applied 
to that portion of the loan allocable to such veteran.

(Authority: 38 U.S.C. 3703)


Sec.  36.4809  Transfer of title by borrower or maturity by demand or 
acceleration.

    (a) Except as provided by paragraphs (b) or (c) of this section the 
conveyance of or other transfer of title to property by operation of 
law or otherwise, after the creation of a lien thereon to secure a loan 
which is guaranteed or insured in whole or in part by the Secretary, 
shall not constitute an event of default, or acceleration of maturity, 
elective or otherwise, and shall not of itself terminate or otherwise 
affect the guaranty or insurance.
    (b)(1) The Secretary may issue guaranty on loans in which a State, 
Territorial, or local governmental agency provides assistance to a 
veteran for the acquisition of a dwelling. Such loans will not be 
considered ineligible for guaranty if the State, Territorial, or local 
authority, by virtue of its laws or regulations or by virtue of Federal 
law, requires the acceleration of maturity of the loan upon the sale or 
conveyance of the security property to a person ineligible for 
assistance from such authority.
    (2) At the time of application for a loan assisted by a State, 
Territorial, or local governmental agency, the veteran-applicant must 
be fully informed and consent in writing to the housing authority 
restrictions. A copy of the veteran's consent statement must be 
forwarded with the loan application or the report of a loan processed 
on the automatic basis.

(Authority: 38 U.S.C. 3703(c))

    (c) Any housing loan which is financed under 38 U.S.C. chapter 37, 
and to which section 3714 of that chapter applies, shall include a 
provision in the security instrument that the holder may declare the 
loan immediately due and payable upon transfer of the property securing 
such loan to any transferee unless the acceptability of the assumption 
of the loan is established pursuant to section 3714.
    (1) A holder may not exercise its option to accelerate a loan upon:

[[Page 6320]]

    (i) The creation of a lien or other encumbrance subordinate to the 
lender's security instrument which does not relate to the transfer of 
rights of occupancy in the property;
    (ii) The creation of a purchase money security interest for 
household appliances;
    (iii) A transfer by devise, descent, or operation of law on the 
death of a joint tenant or tenant by the entirety;
    (iv) The granting of a leasehold interest of three years or less 
not containing an option to purchase;
    (v) A transfer to a relative resulting from the death of a 
borrower;
    (vi) A transfer where the spouse or children of the borrower become 
joint owners of the property with the borrower;
    (vii) A transfer resulting from a decree of a dissolution of 
marriage, legal separation agreement, or from an incidental property 
settlement agreement by which the spouse of the borrower becomes the 
sole owner of the property. In such a case the borrower shall have the 
option of applying directly to the Department of Veterans Affairs 
regional office of jurisdiction for a release of liability in 
accordance with Sec.  36.4826; or
    (viii) A transfer into an inter vivos trust in which the borrower 
is and remains a beneficiary and which does not relate to a transfer of 
rights of occupancy in the property.
    (2) With respect to each such loan at least one of the instruments 
used in the transaction shall contain the following statement: ``This 
loan is not assumable without the approval of the Department of 
Veterans Affairs or its authorized agent.'' This statement must be:
    (i) Printed in a font size which is the larger of:
    (A) Two times the largest font size contained in the body of the 
instrument; or
    (B) 18 points; and
    (ii) Contained in at least one of the following:
    (A) The note;
    (B) The mortgage or deed of trust; or
    (C) A rider to either the note, the mortgage, or the deed of trust.

(Authority: (38 U.S.C. 3714(d))

    (d) The term of payment of any guaranteed or insured obligation 
shall bear a proper relation to the borrower's present and anticipated 
income and expenses, (except loans pursuant to 38 U.S.C. 3710(a)(8) or 
(a)(9)(B)(i)). In addition the terms of payment of any guaranteed or 
insured obligation shall provide for discharge of the obligation at a 
definite date or dates or intervals, in amount specified on or 
computable from the face of the instrument. A loan which is payable on 
demand, or at sight, or on presentation, or at a time not specified or 
computable from the language in the note, mortgage, or other loan 
instrument, or which contemplates periodic renewals at the option of 
the holder to satisfy the repayment requirements of this section, is 
not eligible for guaranty or insurance, except as provided in paragraph 
(f) of this section.
    (e) No guaranteed or insured obligation shall contain a provision 
to the effect that the holder shall have the right to declare the 
indebtedness due, or to pursue one or more legal or equitable remedies, 
if holder ``shall feel insecure,'' or upon the occurrence of one or 
more such conditions optional to the holder, without regard to an act 
or omission by the debtor, which condition by the terms of the note, 
mortgage, or other loan instrument would at the option of the holder 
afford a basis for declaring a default.
    (f) Notwithstanding the inclusion in the guaranteed or insured 
obligation of a provision contrary to the provisions of this section, 
the right of the holder to payment of the guaranty or insurance shall 
not be thereby impaired: Provided,
    (1) Default was declared or maturity was accelerated under some 
other provision of the note, mortgage, or other loan instrument, or
    (2) Activation or enforcement of such provision is warranted under 
Sec.  36.4850(i)(2), or if there exist conditions justifying the 
appointment of a receiver for the property (without reference to any 
contractual provisions for such appointment), or
    (3) The prior approval of the Secretary was obtained.

(Authority: 38 U.S.C. 3703(c))

    (g) The holder of any guaranteed or insured obligation shall have 
the right, notwithstanding the absence of express provision therefor in 
the instruments evidencing the indebtedness, to accelerate the maturity 
of such obligation at any time after the continuance of any default for 
the period of three months.
    (h) If sufficient funds are tendered to bring a delinquency current 
at any time prior to a judicial or statutory sale or other public sale 
under power of sale provisions contained in the loan instruments to 
liquidate any security for a guaranteed loan, the holder shall be 
obligated to accept the funds in payment of the delinquency unless the 
prior approval of the Secretary is obtained to do otherwise, or unless 
reinstatement of the loan would adversely affect the dignity of the 
lien or be otherwise precluded by law. A delinquency will include all 
installment payments (principal, interest, taxes, insurance, advances, 
etc.) due and unpaid and any accumulated late charges plus any 
reasonable expenses incurred and paid by the holder if termination 
proceedings have begun (e.g., advertising costs, foreclosure costs, 
attorney or trustee fees, recording fees, etc.).

(Authority: 38 U.S.C. 3703(c))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0516.)


Sec.  36.4810  Amortization.

    (a) All loans, the maturity date of which is beyond 5 years from 
date of loan or date of assumption by the veteran, shall be amortized. 
Except as provided in paragraph (e) of this section, the schedule of 
payments thereon shall be in accordance with any generally recognized 
plan of amortization requiring approximately equal periodic payments 
and shall require a principal reduction not less often than annually 
during the life of the loan. The final installment on any loan shall 
not be in excess of two times the average of the preceding 
installments, except that on a construction loan such installment may 
be for an amount not in excess of 5 percent of the original principal 
amount of the loan. The limitations imposed herein on the amount of the 
final installment shall not apply in the case of any loan extended 
pursuant to Sec.  36.4815.
    (b) Any plan of repayment on loans required to be amortized which 
does not provide for approximately equal periodic payments shall not be 
eligible unless the plan conforms with the provisions of paragraph (e) 
of this section, or is otherwise approved by the Secretary.
    (c) Every guaranteed or insured loan shall be repayable within the 
estimated economic life of the property securing the loan.
    (d) Subject to paragraph (a) of this section, any amounts which 
under the terms of a loan do not become due and payable on or before 
the last maturity date permissible for loans of its class under the 
limitations contained in 38 U.S.C. chapter 37 shall automatically fall 
due on such date. See Sec.  36.4837.
    (e) A graduated payment mortgage loan, providing for deferrals of 
interest during the first 5 years of the loan and addition of the 
deferred amounts to principal shall be eligible, Provided:
    (1) The loan is for the purpose of acquiring a single-family 
dwelling unit,

[[Page 6321]]

including a condominium unit or simultaneously acquiring and improving 
a previously occupied, existing single-family dwelling unit.
    (2)(i) For proposed construction or existing homes not previously 
occupied (new homes), the maximum loan amount cannot exceed 97.5 
percent of the lesser of the reasonable value of the property as of the 
time the loan is made or the purchase price.
    (ii) For previously occupied, existing homes the maximum loan 
amount must be computed to assure that the principal amount of the 
loan, including all interest scheduled to be deferred and added to the 
loan principal, will not exceed the purchase price or reasonable value 
of the property, whichever is less, as of the time the loan is made;
    (3) The increases in the monthly periodic payment amount occur 
annually on each of the first five annual anniversary dates of the 
first loan installment due date, at a rate of 7.5 percent over the 
preceding year's monthly payment amount;
    (4) Beginning with the payment due on the fifth annual anniversary 
date of the first loan installment due date, all remaining monthly 
periodic payments are approximately equal in amount and amortize the 
loan fully in accordance with the requirements of this section, and
    (5) The plan is otherwise acceptable to the Secretary.

(Authority: 38 U.S.C. 3703(d))


Sec.  36.4811  Prepayment.

    The debtor shall have the right to prepay at any time, without 
premium or fee, the entire indebtedness or any part thereof not less 
than the amount of one installment, or $100, whichever is less. Any 
prepayment in full of the indebtedness shall be credited on the date 
received, and no interest may be charged thereafter. Any partial 
prepayment made on other than an installment due date need not be 
credited until the next following installment due date or 30 days after 
such prepayment, whichever is earlier. The holder and the debtor may 
agree at any time that any prepayment not previously applied in 
satisfaction of matured installments shall be reapplied for the purpose 
of curing or preventing any subsequent default.

(Authority: 38 U.S.C. 3703(d))


Sec.  36.4812  Interest rates.

    (a) In guaranteeing or insuring loans under 38 U.S.C. chapter 37, 
the Secretary may elect to require that such loans either bear interest 
at a rate that is agreed upon by the veteran and the lender, or bear 
interest at a rate not in excess of a rate established by the 
Secretary. The Secretary may, from time to time, change that election 
by publishing a notice in the Federal Register. However, the interest 
rate of a loan for the purpose of an interest rate reduction under 38 
U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) must be less than the 
interest rate of the VA loan being refinanced. This paragraph does not 
apply in the case of an adjustable rate mortgage being refinanced under 
38 U.S.C. 3710(a)(8), (a)(9)(B)(i), or (a)(11) with a fixed rate loan.

(Authority: 38 U.S.C. 3703, 3710)

    (b) For loans bearing an interest rate agreed upon by the veteran 
and the lender, the veteran may pay reasonable discount points in 
connection with the loan. The discount points may not be included in 
the loan amount, except for interest rate reduction refinancing loans 
under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11). For loans 
bearing an interest rate agreed upon by the veteran and the lender, the 
provisions of Sec.  36.4813(d)(6) and (d)(7) do not apply.

(Authority: 38 U.S.C. 3703, 3710)

    (c) Except as provided in Sec.  36.4815, interest in excess of the 
rate reported by the lender when requesting evidence of guaranty or 
insurance shall not be payable on any advance, or in the event of any 
delinquency or default: Provided, that a late charge not in excess of 
an amount equal to 4 percent on any installment paid more than 15 days 
after due date shall not be considered a violation of this limitation.

(Authority: 38 U.S.C. 3710)

    (d) Effective October 1, 2003, adjustable rate mortgage loans which 
comply with the requirements of this paragraph (d) are eligible for 
guaranty.
    (1) Interest rate index. Changes in the interest rate charged on an 
adjustable rate mortgage must correspond to changes in the weekly 
average yield on one year (52 weeks) Treasury bills adjusted to a 
constant maturity. Yields on one year Treasury bills at ``constant 
maturity'' are interpolated by the United States Treasury from the 
daily yield curve. This curve, which relates the yield on the security 
to its time to maturity, is based on the closing market bid yields on 
actively traded one year Treasury bills in the over-the-counter market. 
The weekly average one year constant maturity Treasury bill yields are 
published by the Federal Reserve Board of the Federal Reserve System. 
The Federal Reserve Statistical Release Report H. 15 (519) is released 
each Monday. These one year constant maturity Treasury bill yields are 
also published monthly in the Federal Reserve Bulletin, published by 
the Federal Reserve Board of the Federal Reserve System, as well as 
quarterly in the Treasury Bulletin, published by the Department of the 
Treasury.
    (2) Frequency of interest rate changes. Interest rate adjustments 
must occur on an annual basis, except that the first adjustment may 
occur no sooner than 36 months from the date of the borrower's first 
mortgage payment. The adjusted rate will become effective the first day 
of the month following the adjustment date; the first monthly payment 
at the new rate will be due on the first day of the following month. To 
set the new interest rate, the lender will determine the change between 
the initial (i.e., base) index figure and the current index figure. The 
initial index figure shall be the most recent figure available before 
the date of mortgage loan origination. The current index figure shall 
be the most recent index figure available 30 days before the date of 
each interest rate adjustment.
    (3) Method of rate changes. Interest rate changes may only be 
implemented through adjustments to the borrower's monthly payments.
    (4) Initial rate and magnitude of changes. The initial contract 
interest rate of an adjustable rate mortgage shall be agreed upon by 
the lender and the veteran. Annual adjustments in the interest rate 
shall correspond to annual changes in the interest rate index, subject 
to the following conditions and limitations:
    (i) No single adjustment to the interest rate may result in a 
change in either direction of more than one percentage point from the 
interest rate in effect for the period immediately preceding that 
adjustment. Index changes in excess of one percentage point may not be 
carried over for inclusion in an adjustment in a subsequent year. 
Adjustments in the effective rate of interest over the entire term of 
the mortgage may not result in a change in either direction of more 
than five percentage points from the initial contract interest rate.
    (ii) At each adjustment date, changes in the index interest rate, 
whether increases or decreases, must be translated into the adjusted 
mortgage interest rate, rounded to the nearest one-eighth of one 
percent, up or down. For example, if the margin is 2 percent and the 
new index figure is 6.06 percent, the adjusted mortgage interest rate 
will be 8 percent. If the margin is 2 percent and the new index figure 
is 6.07 percent, the adjusted mortgage interest rate will be 8 1/8 
percent.
    (5) Pre-loan disclosure. The lender shall explain fully and in 
writing to the

[[Page 6322]]

borrower, at the time of loan application, the nature of the obligation 
taken. The borrower shall certify in writing that he or she fully 
understands the obligation and a copy of the signed certification shall 
be placed in the loan folder and furnished to VA upon request.
    (i) The fact that the mortgage interest rate may change, and an 
explanation of how changes correspond to changes in the interest rate 
index;
    (ii) Identification of the interest rate index, its source of 
publication and availability;
    (iii) The frequency (i.e., annually) with which interest rate 
levels and monthly payments will be adjusted, and the length of the 
interval that will precede the initial adjustment; and
    (iv) A hypothetical monthly payment schedule that displays the 
maximum potential increases in monthly payments to the borrower over 
the first five years of the mortgage, subject to the provisions of the 
mortgage instrument.
    (6) Annual disclosure. At least 25 days before any adjustment to a 
borrower's monthly payment may occur, the lender must provide a notice 
to the borrower which sets forth the date of the notice, the effective 
date of the change, the old interest rate, the new interest rate, the 
new monthly payment amount, the current index and the date it was 
published, and a description of how the payment adjustment was 
calculated. A copy of the annual disclosure shall be made a part of the 
lender's permanent record on the loan.

(Authority: 38 U.S.C. 3707A)


Sec.  36.4813  Charges and fees.

    (a) No charge shall be made against, or paid by, the borrower 
incident to the making of a guaranteed or insured loan other than those 
expressly permitted under paragraph (d) or (e) of this section, and no 
loan shall be guaranteed or insured unless the lender certifies to the 
Secretary that it has not imposed and will not impose any charges or 
fees against the borrower in excess of those permissible under 
paragraph (d) or (e) of this section. Any charge which is proper to 
make against the borrower under the provisions of this paragraph may be 
paid out of the proceeds of the loan: Provided, That if the purpose of 
the loan is to finance the purchase or construction of residential 
property the costs of closing the loan including the pro rata portion 
of the ground rents, hazard insurance premiums, current year's taxes, 
and other prepaid items normally involved in financing such transaction 
may not be included in the loan.
    (b) Except as provided in this subpart, no brokerage or service 
charge or their equivalent may be charged against the debtor or the 
proceeds of the loan either initially, periodically, or otherwise.
    (c) Brokerage or other charges shall not be made against the 
veteran for obtaining any guaranty or insurance under 38 U.S.C. chapter 
37, nor shall any premiums for insurance on the life of the borrower be 
paid out of the proceeds of a loan.
    (d) The following schedule of permissible fees and charges shall be 
applicable to all Department of Veterans Affairs guaranteed or insured 
loans.
    (1) The veteran may pay reasonable and customary amounts for any of 
the following items:
    (i) Fees of Department of Veterans Affairs appraiser and of 
compliance inspectors designated by the Department of Veterans Affairs 
except appraisal fees incurred for the predetermination of reasonable 
value requested by others than veteran or lender.
    (ii) Recording fees and recording taxes or other charges incident 
to recordation.
    (iii) Credit report.
    (iv) That portion of taxes, assessments, and other similar items 
for the current year chargeable to the borrower and an initial deposit 
(lump-sum payment) for the tax and insurance account.
    (v) Hazard insurance required by Sec.  36.4829.
    (vi) Survey, if required by lender or veteran; except that any 
charge for a survey in connection with a loan under Sec. Sec.  36.4860 
through 36.4865 (Condominium Loans) must have the prior approval of the 
Secretary.
    (vii) Title examination and title insurance, if any.
    (viii) The actual amount charged for flood zone determinations, 
including a charge for a life-of-the-loan flood zone determination 
service purchased at the time of loan origination, if made by a third 
party who guarantees the accuracy of the determination. A fee may not 
be charged for a flood zone determination made by a Department of 
Veterans Affairs appraiser or for the lender's own determination.
    (ix) Such other items as may be authorized in advance by the Under 
Secretary for Benefits as appropriate for inclusion under this 
paragraph (d) as proper local variances.
    (2) A lender may charge and the veteran may pay a flat charge not 
exceeding 1 percent of the amount of the loan, provided that such flat 
charge shall be in lieu of all other charges relating to costs of 
origination not expressly specified and allowed in this schedule.
    (3) In cases where a lender makes advances to a veteran during the 
progress of construction, alteration, improvement, or repair, either 
under a commitment of the Department of Veterans Affairs to issue a 
guaranty certificate or insurance credit upon completion, or where the 
lender would be entitled to guaranty or insurance on such advances when 
reported under automatic procedure, the lender may make a charge 
against the veteran of not exceeding 2 percent of the amount of the 
loan for its services in supervising the making of advances and the 
progress of construction notwithstanding that the ``holdback'' or final 
advance is not actually paid out until after the construction, 
alteration, improvement, or repair is fully completed: Provided, That 
the major portion (51 percent or more) of the loan proceeds is paid out 
during the actual progress of the construction, alteration, 
improvement, or repair. Such charge may be in addition to the 1 percent 
charge allowed under paragraph (d)(2) of this section.
    (4) In consideration, alteration, improvement or repair loans, 
including supplemental loans made pursuant to Sec.  36.4859, where no 
charge is permissible under the provisions of paragraph (d)(3) of this 
section the lender may charge and the veteran may pay a flat sum not 
exceeding 1 percent of the amount of the loan. Such charge may be in 
addition to the 1 percent allowed under paragraph (d)(2) of this 
section.
    (5) The fees and charges permitted under this paragraph are 
maximums and are not intended to preclude a lender from making 
alternative charges against the veteran which are not specifically 
authorized in the schedule provided the imposition of such alternative 
charges would not result in an aggregate charge or payment in excess of 
the prescribed maximum.
    (6) The veteran borrower subject to the limitations set forth in 
paragraphs (d)(6) and (7) of this section may pay a discount required 
by a lender when the proceeds of the loan will be used for any of the 
following purposes:
    (i) To refinance existing indebtedness pursuant to 38 U.S.C. 
3710(a)(5), (a)(8), (a)(9)(B)(i) or (a)(9)(B)(ii);
    (ii) To repair, alter or improve a dwelling owned by the veteran 
pursuant to 38 U.S.C. 3710(a)(4) or (7) if such loan is to be secured 
by a first lien;
    (iii) To construct a dwelling or farm residence on land already 
owned or to be acquired by the veteran, provided that the veteran did 
not or will not acquire the land directly or indirectly

[[Page 6323]]

from a builder or developer who will be constructing such dwelling or 
farm residence;
    (iv) To purchase a dwelling from a class of sellers which the 
Secretary determines are legally precluded under all circumstances from 
paying such a discount if the best interest of the veteran would be so 
served.
    (7) Discounts shall be computed as follows:
    (i) Unless otherwise approved by the Secretary, the discount, if 
any, to be paid by the borrower on a loan secured by a first lien may 
not exceed the difference between the bid price, rounded to the lower 
whole number, and par value for GNMA (Government National Mortgage 
Association) 90-day forward bid closing price for pass through 
securities \1/2\ percent less than the face note rate of the loan. 
Unless the lender and borrower negotiate a firm written commitment for 
a maximum amount of discount to be paid, the bid price to be used in 
the computation must be the GNMA 90-day forward bid closing quote for 
any day 1 to 4 business days prior to loan closing. ``Loan closing'' is 
defined for this purpose as the date on which the borrower's 3-day 
right of rescission commences pursuant to the Truth in Lending Act. If 
the lender and borrower choose to negotiate a firm discount commitment 
for a maximum amount of discount to be paid, the bid price to be used 
in establishing the maximum discount must be the closing quote for the 
business day prior to the date of the commitment. Lenders negotiating 
firm commitments must close that loan at a discount no higher than the 
firm commitment regardless of changes in the maximum allowable 
Department of Veterans Affairs interest rate. If a lender's commitment 
expires prior to loan closing, the lender and borrower may negotiate a 
new firm commitment based on the procedure outlined in this paragraph 
(d)(7)(i) or may use the procedure for determining the discount based 
on the GNMA 90-day forward bid closing quote for any day 1 to 4 
business days prior to loan closing.
    (ii) The borrower, subject to the limitations set forth in 
paragraphs (d)(6) and (7) of this section, may pay a discount required 
by the lender when the proceeds of the loan will be used to repair, 
alter, or improve a dwelling owned by the veteran pursuant to 38 U.S.C. 
3710(a)(4) or (7) if such loan is unsecured or secured by less than a 
first lien. No such discount may be charged unless:
    (A) The loan is submitted to the Secretary for prior approval;
    (B) The dollar amount of the discount is disclosed to the Secretary 
and the veteran prior to the issuance by the Secretary of the 
certificate of commitment. Said certificate of commitment shall specify 
the discount to be paid by the veteran, and this discount may not be 
increased once the commitment is issued without the approval of the 
Secretary; and
    (C) The discount has been determined by the Secretary to be 
reasonable in amount.
    (iii) A veteran may pay the discount on an acquisition and 
improvement loan (as defined in Sec.  36.4801) provided:
    (A) The veteran pays no discount on the acquisition portion of the 
loan except in accordance with paragraph (d)(6)(iv) of this section; 
and
    (B) The discount paid on the improvements portion of the loan does 
not exceed the percentage of discount paid on the acquisition portion 
of the loan.
    Note to paragraph (d)(7)(iii): Acquisition and improvement loans 
may be closed either on the automatic or prior approval basis.
    (iv) Unless the Under Secretary for Benefits otherwise directs, all 
powers of the Secretary under paragraphs (d)(6) and (7) of this section 
are hereby delegated to the officials designated by Sec.  36.4845(b).

(Authority: 38 U.S.C. 3703, 3710; 42 U.S.C. 4001 note, 4012a)

    (8) On any loan to which 38 U.S.C. 3714 applies, the holder may 
charge a reasonable fee, not to exceed the lesser of $300 and the 
actual cost of any credit report required, or any maximum prescribed by 
applicable State law, for processing an application for assumption and 
changing its records.

(Authority: 38 U.S.C. 3714)

    (e) Subject to the limitations set out in paragraph (e)(4) of this 
section, a fee must be paid to the Secretary.
    (1) The fee on loans to veterans shall be as follows:
    (i) On all interest rate reduction refinancing loans guaranteed 
under 38 U.S.C. 3710(a)(8), (a)(9)(B)(i), and (a)(11), the fee shall be 
0.50 percent of the total loan amount.
    (ii) On all refinancing loans other than those described in 
paragraph (e)(1)(i) of this section, the funding fee shall be 2.75 
percent of the loan amount for loans to veterans whose entitlement is 
based on service in the Selected Reserve under the provisions of 38 
U.S.C. 3701(b)(5), and 2 percent of the loan amount for loans to all 
other veterans; provided, however, that if the veteran is using 
entitlement for a second or subsequent time, the fee shall be 3 percent 
of the loan amount.
    (iii) Except for loans to veterans whose entitlement is based on 
service in the Selected Reserve under the provisions of 38 U.S.C. 
3701(b)(5), the funding fee shall be 2 percent of the total loan amount 
for all loans for the purchase or construction of a home on which the 
veteran does not make a down payment, unless the veteran is using 
entitlement for a second or subsequent time, in which case the fee 
shall be 3 percent. On purchase or construction loans on which the 
veteran makes a down payment of 5 percent or more, but less than 10 
percent, the amount of the funding fee shall be 1.50 percent of the 
total loan amount. On purchase or construction loans on which the 
veteran makes a down payment of 10 percent or more, the amount of the 
funding fee shall be 1.25 percent of the total loan amount.
    (iv) On loans to veterans whose entitlement is based on service in 
the Selected Reserve under the provisions of 38 U.S.C. 3701(b)(5), the 
funding fee shall be 2.75 percent of the total loan amount on loans for 
the purchase or construction of a home on which the veteran does not 
make a down payment, unless the veteran is using entitlement for a 
second or subsequent time, in which case the fee shall be 3 percent. On 
purchase or construction loans on which veterans whose entitlement is 
based on service in the Selected Reserve make a down payment of 5 
percent or more, but less than 10 percent, the amount of the funding 
fee shall be 2.25 percent of the total loan amount. On purchase or 
construction loans on which such veterans make a down payment of 10 
percent or more, the amount of the funding fee shall be 2 percent of 
the total loan amount.
    (v) All or part of the fee may be paid in cash at loan closing or 
all or part of the fee may be included in the loan without regard to 
the reasonable value of the property or the computed maximum loan 
amount, as appropriate. In computing the fee, the lender will disregard 
any amount included in the loan to enable the borrower to pay such fee.

(Authority: 38 U.S.C. 3729)

    (2) Subject to the limitations set out in this section, a fee of 
one-half of one percent of the loan balance must be paid to the 
Secretary in a manner prescribed by the Secretary by a person assuming 
a loan to which 38 U.S.C. 3714 applies. The instrument securing such a 
loan shall contain a provision describing the right of the holder to 
collect this fee as trustee for the Department of Veterans

[[Page 6324]]

Affairs. The loan holder shall list the amount of this fee in every 
assumption statement provided and include a notice that the fee must be 
paid to the holder immediately following loan settlement. The fee must 
be transmitted to the Secretary within 15 days of the receipt by the 
holder of the notice of transfer.

(Authority: 38 U.S.C. 3714, 3729)

    (3) The lender is required to pay to the Secretary the fee 
described in paragraph (e)(1) of this section within 15 days after loan 
closing. Any lender closing a loan, subject to the limitations set out 
in paragraph (e)(4) of this section who fails to submit timely payment 
of this fee will be subject to a late charge equal to 4 percent of the 
total fee due. If payment of the fee described in paragraph (e)(1) of 
this section is made more than 30 days after loan closing, interest 
will be assessed at a rate set in conformity with the Department of 
Treasury's Fiscal Requirements Manual. This interest charge is in 
addition to the 4 percent late charge, but the late charge is not 
included in the amount on which interest is computed. This interest 
charge is to be calculated on a daily basis beginning on the date of 
closing, although the interest will be assessed only on funding fee 
payments received more than 30 days after closing.
    (4) The lender is required to pay to the Secretary electronically 
through the Automated Clearing House (ACH) system the fees described in 
paragraphs (e)(1) and (e)(2) of this section and any late fees and 
interest due on them. This shall be paid to a collection agent by 
operator-assisted telephone, terminal entry, or CPU-to-CPU 
transmission. The collection agent will be identified by the Secretary. 
The lender shall provide the collection agent with the following: 
authorization for payment of the funding fee (including late fees and 
interest) along with the following information: VA lender ID number; 
four-digit personal identification number; dollar amount of debit; VA 
loan number; OJ (office of jurisdiction) code; closing date; loan 
amount; information about whether the payment includes a shortage, late 
charge, or interest; veteran name; loan type; sale amount; down 
payment; whether the veteran is a reservist; and whether this is a 
subsequent use of entitlement. For all transactions received prior to 
8:15 p.m. on a workday, VA will be credited with the amount paid to the 
collection agent at the opening of business the next banking day.

(Authority: 38 U.S.C. 3729(a))

    (5) The fees described in paragraph (e)(1) and (e)(2) of this 
section shall not be collected from a veteran who is receiving 
compensation (or who but for the receipt of retirement pay would be 
entitled to receive compensation) or from a surviving spouse described 
in section 3701(b) of title 38, United States Code.

(Authority: 38 U.S.C. 3729)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control numbers 2900-
0474 and 2900-0516.)

Sec.  36.4814  Advances and other charges.

    (a) A holder may advance any amount reasonably necessary and proper 
for the maintenance or repair of the security, or for the payment of 
accrued taxes, special assessments, ground or water rents, or premiums 
on fire or other casualty insurance against loss of or damage to such 
property and any such advance so made may be added to the guaranteed or 
insured indebtedness. A holder may also advance the one-half of one 
percent funding fee due on a transfer under 38 U.S.C. 3714 when this is 
not paid at the time of transfer. All security instruments for loans to 
which 38 U.S.C. 3714 applies must include a clause authorizing the 
collection of an assumption funding fee and an advance for this fee if 
it is not paid at the time of transfer.

(Authority: 38 U.S.C. 3703, 3714, 3732)

    (b) In addition to advances allowable under paragraph (a) of this 
section, the holder may charge against the proceeds of the sale of the 
security; may charge against gross amounts collected; may include in 
any accounting to the Secretary after payment of a claim under the 
guaranty; may include in the computation of a claim under the guaranty, 
if lawfully authorized by the loan agreement and subject to Sec.  
36.4824(a); or, may include in the computation of an insurance loss, 
any of the following items actually paid:
    (1) Any expense which is reasonably necessary for preservation of 
the security;
    (2) Court costs in a foreclosure or other proper judicial 
proceeding involving the security;
    (3) Other expenses reasonably necessary for collecting the debt, or 
repossession or liquidation of the security;
    (4) Reasonable trustee's fees or commissions not in excess of those 
allowed by statute and in no event in excess of 5 percent of the unpaid 
indebtedness;
    (5)(i) Fees for legal services actually performed, not to exceed 
the reasonable and customary fees for such services in the State where 
the property is located, as determined by the Secretary.
    (ii) In determining what constitutes the reasonable and customary 
fees for legal services, the Secretary shall review allowances for 
legal fees in connection with the foreclosure of single-family housing 
loans, including bankruptcy-related services, issued by HUD, Fannie 
Mae, and Freddie Mac. The Secretary will review such fees annually and, 
as the Secretary deems necessary, publish in the Federal Register a 
table setting forth the amounts the Secretary determines to be 
reasonable and customary. The table will reflect the primary method for 
foreclosing in each state, either judicial or non-judicial, with the 
exception of those States where either judicial or non-judicial is 
acceptable. The use of a method not authorized in the table will 
require prior approval from VA. This table will be available throughout 
the year on a VA controlled Web site, such as at http://www.homeloans.va.gov.
    (iii) If the foreclosure attorney has the discretion to conduct the 
sale or to name a substitute trustee to conduct the sale, the combined 
total paid for legal fees under paragraph (b)(5)(i) of this section and 
trustee's fees pursuant to paragraph (b)(4) of this section shall not 
exceed the applicable maximum allowance for legal fees established 
under paragraph (b)(5)(ii) of this section. If the trustee conducting 
the sale must be a Government official under local law, or if an 
individual other than the foreclosing attorney (or any employee of that 
attorney) is appointed as part of judicial proceedings, and local law 
also establishes the fees payable for the services of the public or 
judicially appointed trustee, then those fees will not be subject to 
the maximum established for legal fees under paragraph (b)(5)(ii) of 
this section and may be included in the total indebtedness.
    (6) The cost of a credit report(s) on the debtor(s), which is (are) 
to be forwarded to the Secretary in connection with the claim;
    (7) Reasonable and customary costs of property inspections;
    (8) Any other expense or fee that is approved in advance by the 
Secretary.

(Authority: 38 U.S.C. 3720(a)(3), 3732)

    (c) Any advances or charges enumerated in paragraph (a) or (b) of 
this section may be included as specified in the holder's accounting to 
the Secretary, but they are not chargeable to the debtor unless he or 
she otherwise be liable therefor.
    (d) Advances of the type enumerated in paragraph (a) of this 
section and any

[[Page 6325]]

other advances determined by VA to be necessary and proper in order to 
preserve or protect the security may be authorized by employees 
designated in Sec.  36.4845(b) in the case of any property constituting 
the security for a loan acquired by the Secretary or constituting the 
security for the unpaid balance of the purchase price owing to the 
Secretary on account of the sale of such property. Such advances shall 
be secured to the extent legal and practicable by a lien on the 
property.
    (e) Notwithstanding the provisions of paragraph (a) or (b) of this 
section, holders of condominium loans guaranteed or insured under 38 
U.S.C. 3710(a)(6) shall not pay those assessments or charges allocable 
to the condominium unit which are provided for in the instruments 
establishing the condominium form of ownership in the absence of the 
prior approval of the Secretary.
    (f)(1) Fees and charges otherwise allowable by this section that 
accrue after the date specified in paragraph (f)(2) of this section may 
not be included in a claim under the guaranty.
    (2) The date referenced in paragraph (f)(1) of this section will be 
computed by adding 210 calendar days to the due date of the last paid 
installment, plus the reasonable period that the Secretary has 
determined, pursuant to Sec.  36.4822(a), it should have taken to 
complete the foreclosure. There will also be added to the time period 
specified in the previous sentence such additional time as the 
Secretary determines was reasonably necessary to complete the 
foreclosure if the Secretary determines the holder was unable to 
complete the foreclosure within the time specified in that section due 
to Bankruptcy proceedings, appeal of the foreclosure by the debtor, the 
holder granting forbearance in excess of 30 days at the request of the 
Secretary, or other factors beyond the control of the holder.

(Authority: 38 U.S.C. 3703(c), 3720, 3732)

Sec.  36.4815  Loan modifications.

    (a) Subject to the provisions of this section, the terms of any 
guaranteed loan may be modified by written agreement between the holder 
and the borrower, without prior approval of the Secretary, if all of 
the following conditions are met:
    (1) The loan is in default;
    (2) The event or circumstances that caused the default has been or 
will be resolved and it is not expected to re-occur;
    (3) The obligor is considered to be a reasonable credit risk, based 
on a review by the holder of the obligor's creditworthiness under the 
criteria specified in Sec.  36.4840, including a current credit report. 
The fact of the recent default will not preclude the holder from 
determining the obligor is now a satisfactory credit risk provided the 
holder determines that the obligor is able to resume regular mortgage 
installments when the modification becomes effective based upon a 
review of the obligor's current and anticipated income, expenses, and 
other obligations as provided in Sec.  36.4840;
    (4) At least 12 monthly payments have been paid since the closing 
date of the loan;
    (5) The current owner(s) is obligated to repay the loan, and is 
party to the loan modification agreement; and
    (6) The loan will be reinstated to performing status by virtue of 
the loan modification.
    (b) Without the prior approval of the Secretary, a loan can be 
modified no more than once in a 3-year period and no more than three 
times during the life of the loan.
    (c) All modified loans must bear a fixed-rate of interest, which 
may not exceed the Government National Mortgage Association (GNMA) 
current month coupon rate that is closest to par (100) plus 50 basis 
points. The rate shall be determined as of the close of business the 
last business day of the month preceding the date the holder approved 
the loan modification.
    (d) The unpaid balance of the modified loan may be re-amortized 
over the remaining life of the loan. The loan term may extend the 
maturity date to the shorter of:
    (1) 360 months from the due date of the first installment required 
under the modification, or
    (2) 120 months after the original maturity date of the loan.
    (e) Only unpaid principal; accrued interest; deficits in the taxes 
and insurance impound accounts; and advances required to preserve the 
lien position, such as homeowner association fees, special assessments, 
water and sewer liens, etc., may be included in the modified 
indebtedness. Late fees and other charges may not be capitalized.
    (f) Holders shall not charge a processing fee under any 
circumstances to complete a loan modification. However, late fees and 
any other actual costs incurred and legally chargeable, including but 
not limited to the cost of a title insurance policy for the modified 
loan, but which cannot be capitalized in the modified indebtedness, may 
be collected directly from the borrower as part of the modification 
process.
    (g) Holders will ensure the first lien status of the modified loan.
    (h) The dollar amount of the guaranty may not exceed the greater 
of:
    (1) The original guaranty amount of the loan being modified (but if 
the modified loan amount is less than the original loan amount, then 
the amount of guaranty will be equal to the original guaranty 
percentage applied to the modified loan), or
    (2) 25 percent of the loan being modified subject to the statutory 
maximum specified at 38 U.S.C. 3703(a)(1)(B).
    (i) The obligor may not receive any cash back from the 
modification.
    (j) This section does not create a right of a borrower to have a 
loan modified, but simply authorizes the loan holder to modify a loan 
in certain situations without the prior approval of the Secretary.

(Authority: 38 U.S.C. 3703(c)(1), 3720)


Sec.  36.4816  Acceptability of partial payments.

    A partial payment is a remittance by or on behalf of the borrower 
on a loan in default (as defined in Sec.  36.4801) of any amount less 
than the full amount due under the terms of the loan and security 
instruments at the time the remittance is tendered.
    (a) Except as provided in paragraph (b) of this section, or upon 
the express waiver of the Secretary, the mortgage holder shall accept 
any partial payment and either apply it to the mortgagor's account or 
identify it with the mortgagor's account and hold it in a special 
account pending disposition. When partial payments held for disposition 
aggregate a full monthly installment, including escrow, they shall be 
applied to the mortgagor's account.
    (b) A partial payment may be returned to the mortgagor, within 10 
calendar days from date of receipt of such payment, with a letter of 
explanation only if one or more of the following conditions exist:
    (1) The property is wholly or partially tenant-occupied and rental 
payments are not being remitted to the holder for application to the 
loan account;
    (2) The payment is less than one full monthly installment, 
including escrows and late charge, if applicable, unless the lesser 
payment amount has been agreed to under a documented repayment plan;
    (3) The payment is less than 50 percent of the total amount then 
due, unless the lesser payment amount has been agreed to under a 
documented repayment plan;

[[Page 6326]]

    (4) The payment is less than the amount agreed to in a documented 
repayment plan;
    (5) The amount tendered is in the form of a personal check and the 
holder has previously notified the mortgagor in writing that only cash 
or certified remittances are acceptable;
    (6) A delinquency of any amount has continued for at least 6 months 
since the account first became delinquent and no written repayment plan 
has been arranged;
    (7) Foreclosure has been commenced by the taking of the first 
action required for foreclosure under local law; or
    (8) The holder's lien position would be jeopardized by acceptance 
of the partial payment.
    (c) A failure by the holder to comply with the provisions of this 
paragraph may result in a partial or total loss of guaranty or 
insurance pursuant to Sec.  36.4828(b), but such failure shall not 
constitute a defense to any legal action to terminate the loan.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4817  Servicer reporting requirements.

    (a) Servicers of loans guaranteed by the Secretary shall report the 
information required by this section to the Secretary electronically. 
The Secretary shall accept electronic submission from each entity 
servicing loans guaranteed under 38 U.S.C. chapter 37 not later than 
the effective date of this rule.
    (b) Not later than the seventh calendar day of each month each 
servicer shall report to the Secretary basic information (loan 
identification information, payment due date, and unpaid principal 
balance) for every loan guaranteed by the Secretary currently being 
serviced by that entity, unless previously reported under paragraph 
(c)(7) of this section and has not reinstated, terminated, or paid in 
full.
    (c) Servicers shall report to the Secretary the following specific 
loan events in accordance with the timeframes described for each event. 
Unless otherwise specified herein, the servicer shall report these 
events on a monthly basis (i.e., no later than the 7th calendar day of 
the month following the month in which the event occurred) only for 
delinquent loans in its portfolio.
    (1) Loan paid in full--when the loan obligation has been fully 
satisfied by receipt of funds and not a servicing transfer. The 
servicer shall report this event regardless of delinquency status.
    (2) Authorized transfer of ownership--when the servicer learns that 
an authorized transfer of ownership has been completed. The servicer 
shall report this event regardless of delinquency status.
    (3) Release of liability--when an obligor has been released from 
liability. The servicer shall report this event regardless of 
delinquency status.
    (4) Partial release of security--when the holder has released the 
lien on a part of the security for the loan pursuant to Sec.  36.4827. 
The servicer shall report this event regardless of delinquency status.
    (5) Servicing transfer (transferring servicer)--when a holder 
transfers the loan to another servicer.
    (6) Servicing transfer (receiving servicer)--when a servicer boards 
the loan.
    (7) Electronic Default Notification (EDN)--when the loan becomes at 
least 61 days delinquent. The servicer shall report this event no later 
than the 7th calendar day from when the event occurred. The servicer 
shall report this event only once per default for delinquent loans in 
its portfolio.
    (8) Delinquency status--when the servicer notifies VA of any 
updates to the delinquency information on loans for which an EDN has 
been submitted. The servicer shall report this event monthly (i.e., no 
later than the 7th calendar day of the month following the month for 
which the reported information applies) until the default cures or the 
loan terminates.
    (9) Contact information change--when there is a change to the 
contact information for current owners or a property or mailing address 
change.
    (10) Occupancy status change--when there is a change in property 
occupancy status.
    (11) Bankruptcy filed--when any owner files a petition under the 
Bankruptcy Code. The servicer shall report this event no later than the 
7th calendar day from when the event occurred. The servicer shall 
report this event only on delinquent loans in its portfolio, if 
appropriate, or with the EDN when it is reported.
    (12) Bankruptcy update--when a significant event related to the 
bankruptcy has occurred. The servicer shall report this event no later 
than the 7th calendar day from when the event occurred. The servicer 
shall report this event only on delinquent loans in its portfolio, if 
appropriate, or with the EDN when it is reported.
    (13) Loss mitigation letter sent--when the servicer sends the loss 
mitigation letter to the borrower as required by Sec.  
36.4850(g)(1)(iv).
    (14) Partial payment returned--when the servicer returns a partial 
payment to the borrower.
    (15) Default cured/loan reinstated--when a previously reported 
default (i.e. an EDN was filed) has cured/loan reinstated.
    (16) Default reported to credit bureau--when the servicer notifies 
the credit bureaus of a defaulted loan or loan termination. The 
servicer shall report this event only on delinquent loans in its 
portfolio, and shall report the first occurrence only.
    (17) Repayment plan approved--when the servicer approves a 
repayment plan.
    (18) Special forbearance approved--when the servicer approves a 
special forbearance agreement.
    (19) Loan modification approved--when the servicer approves a loan 
modification.
    (20) Loan modification complete--when both the servicer (and/or the 
holder, where necessary) and the owner(s) have executed the 
modification agreement.
    (21) Compromise sale complete--when a compromise sale closes.
    (22) Deed-in-lieu of foreclosure complete--when the servicer 
records the deed-in-lieu of foreclosure. The servicer shall report this 
no later than the 7th calendar day from when the event occurred.
    (23) Foreclosure referral--when the loan is referred to legal 
counsel for foreclosure. The servicer shall report this no later than 
the 7th calendar day from when the event occurred.
    (24) Foreclosure sale scheduled--when the foreclosure sale is 
scheduled. The servicer shall report this no later than the 7th 
calendar day from when the event occurred.
    (25) Results of sale--when the foreclosure sale is complete, the 
servicer reports the results of the foreclosure sale. The servicer 
shall report this no later than the 7th calendar day from when the 
event occurred.
    (26) Transfer of custody--when the servicer notifies VA of the 
holder's intent to convey the property. The servicer shall report this 
no later than the 15th calendar day from the date of liquidation sale 
(such as the date of foreclosure sale, date of recordation of a deed-
in-lieu of foreclosure, or confirmation/ratification of sale date when 
required under local practice).
    (27) Improper transfer of custody--when the servicer discovers that 
the conveyance of the property to VA was improper. The servicer shall 
report this no later than the 7th calendar day from when the error is 
discovered.
    (28) Invalid sale results--when the foreclosure sale is invalid. 
The servicer shall report this no later than the 7th

[[Page 6327]]

calendar day from discovery of the event that invalidated the sale.
    (29) Confirmed sale date with no transfer of custody--when the loan 
is terminated, the property is not conveyed, and the property is 
located in a confirmation/ratification of sale state.
    (30) Basic claim information--when the servicer files a claim under 
guaranty. The servicer shall report this event within 365 calendar days 
of loan termination for non-refund claims, and within 60 calendar days 
of the refund approval date for refund claims.
    (31) Refunding Settlement--when VA refunds a loan and the servicer 
reports the tax and insurance information. The servicer shall report 
this event within 60 calendar days of the refund approval date.

(Authority: 38 U.S.C. 3703(c), 3732)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0021.)


Sec.  36.4818  Servicer tier ranking--temporary procedures.

    (a) The Secretary shall assign to each servicer a ``Tier Ranking'' 
based upon the servicer's performance in servicing guaranteed loans. 
There shall be four tiers, known as tier one, tier two, tier three, and 
tier four, with tier one being the highest rated and tier four the 
lowest. Upon the effective date of this regulation, every servicer of 
loans guaranteed by the Secretary shall be presumed to be in servicer 
tier two, and shall remain in tier two until the date specified in 
paragraph (c)(2) of this section.
    (b) For purposes of this section, the term ``calendar quarter'' 
shall mean the 3-month periods ending on March 31, June 30, September 
30, and December 31.
    (c)(1) No later than 30 calendar days after the last business day 
of the first calendar quarter occurring after the rules for determining 
tier rankings take effect, and then not later than 30 calendar days 
after the last business day of each subsequent calendar quarter, the 
Secretary shall provide each servicer with an evaluation of their 
performance under such rules.
    (2) No later than 45 calendar days after the last business day of 
the fourth calendar quarter during which the Secretary evaluates the 
performance of servicers, and then annually thereafter, VA shall advise 
each servicer of its tier ranking.
    (3) Any entity which begins servicing guaranteed loans after the 
first calendar quarter occurring after rules for determining tier 
rankings take effect shall be presumed to be in tier two. The Secretary 
will evaluate the performance of such servicer as provided in paragraph 
(c)(1) of this section. The Secretary will advise such servicer of its 
tier ranking at the time other servicers are advised of their tier 
rankings pursuant to paragraph (c)(2) of this section, provided the 
servicer has received evaluations for at least four continuous calendar 
quarters.
    (d) The quarterly evaluation and tier ranking of a servicer shall 
be deemed to be confidential and privileged and shall not be disclosed 
by the Secretary to any other party.

(Authority: 38 U.S.C. 3703(c))


Sec.  36.4819  Servicer loss-mitigation options and incentives.

    (a) The Secretary will pay a servicer in tiers one, two, or three 
an incentive payment for each of the following successful loss-
mitigation options or alternatives to foreclosure completed: repayment 
plans, special forbearance agreements, loan modifications, compromise 
sales, and deeds-in-lieu of foreclosure. Only one incentive payment 
will be made with respect to any default required to be reported to the 
Secretary pursuant to Sec.  36.4817(c). No incentive payment will be 
made to a servicer in tier four. The options and alternatives are 
listed in paragraph (b) of this section from top to bottom in their 
preferred order of consideration (i.e., a hierarchy for review), but VA 
recognizes that individual circumstances may lead to ``out of the 
ordinary'' considerations.
    (b) The amount of the incentive payment is as follows:

----------------------------------------------------------------------------------------------------------------
                        Tier ranking                              One          Two         Three         Four
----------------------------------------------------------------------------------------------------------------
Repayment Plan..............................................         $200         $160         $120           $0
Special Forbearance.........................................          200          160          120            0
Loan Modification...........................................          700          500          300            0
Compromise Sale.............................................        1,000          800          600            0
Deed in Lieu of Foreclosure.................................          350          250          150            0
----------------------------------------------------------------------------------------------------------------

    (c) For purposes of this section, a loss-mitigation option or 
alternative to foreclosure will be deemed successfully completed as 
follows:
    (1) With respect to a repayment plan (as defined in Sec.  36.4801), 
when the loan reinstates;
    (2) With respect to special forbearance (as defined in Sec.  
36.4801), when the loan reinstates. If a repayment plan is developed at 
the end of the forbearance period, then the special forbearance is not 
eligible for an incentive payment, although the subsequent repayment 
plan may be eligible upon loan reinstatement;
    (3) With respect to a loan modification, when the modification is 
executed and the loan reinstates;
    (4) With respect to a compromise sale, when the claim under 
guaranty is filed; or
    (5) With respect to a deed-in-lieu of foreclosure, when the claim 
under guaranty is filed.
    (d) Incentive payments with respect to repayment plans, special 
forbearances and loan modifications shall be made no less frequently 
than monthly. For all other successful loss-mitigation options, 
incentives shall be paid in the final claim payment.
    (e) The Secretary shall reserve the right to stop an incentive 
payment to a servicer if the servicer fails to perform adequate 
servicing.

(Authority: 38 U.S.C. 3703(c), 3720, 3722)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0021.)


Sec.  36.4820  Refunding of loans in default.

    (a) Upon receiving a notice of default or a notice under Sec.  
36.4817, the Secretary may require the holder upon penalty of otherwise 
losing the guaranty or insurance to transfer and assign the loan and 
the security therefore to the Secretary or to another designated by the 
Secretary upon receipt of payment in full of the balance of the 
indebtedness remaining unpaid to the date of such assignment. Such 
assignment may be made without recourse but the transferor shall not 
thereby be relieved from the provisions of Sec.  36.4828.
    (b) If the obligation is assigned or transferred to a third party 
pursuant to paragraph (a) of this section the Secretary may continue in 
effect the guaranty or insurance issued with respect to the previous 
loan in such

[[Page 6328]]

manner as to cover the assignee or transferee.
    (c) Servicers must deliver to the Secretary all legal documents, 
including but not limited to proper loan assignments, required as 
evidence of proper loan transfer within 60 calendar days from the date 
that VA sends notice to the servicer that VA has decided to refund a 
loan under this section. Servicers exhibiting a continued failure to 
provide timely loan transfer documentation may, at the discretion of 
the Secretary and following advance notice to the servicer, be subject 
to temporary suspension of all property acquisition and claim payments 
until all deficiencies identified in the notice provided to the 
servicer have been corrected.

(Authority: 38 U.S.C. 3703(c) and 3732(a))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0362.)


Sec.  36.4821  Service of process.

    (a) In any legal or equitable proceeding to which the Secretary is 
a party (including probate and bankruptcy proceedings) arising from a 
loan guaranteed, insured, or made, or a property acquired by the 
Secretary pursuant to title 38, U.S.C. chapter 37, original process and 
any other process prior to appearance that may be served on the 
Secretary must be delivered to the VA Regional Counsel located in the 
jurisdiction in which the proceeding is docketed. Copies of such 
process will also be served on the Attorney General of the United 
States and the United States Attorney having jurisdiction over that 
area. Within the time required by applicable law, or rule of court, the 
Secretary will cause appropriate special or general appearance to be 
entered in the case by an authorized attorney.

(Authority: 38 U.S.C. 3703(c) and 3720(a))

    (b) After appearance of the Secretary by attorney all process and 
notice otherwise proper to serve on the Secretary before or after 
judgment, if served on the attorney of record, shall have the same 
effect as if the Secretary were personally served within the 
jurisdiction of the court.

(Authority: 38 U.S.C. 3720, 3732)


Sec.  36.4822  Loan termination.

    (a) For purposes of this part, a holder, using reasonable diligence 
must complete a foreclosure within the timeframe and in the manner 
determined by the Secretary. In determining what constitutes allowable 
time and method for foreclosure, the Secretary shall review allowances 
for time and method in connection with the foreclosure of single-family 
housing loans issued by HUD, Fannie Mae, and Freddie Mac, as well as 
State statutory requirements. The Secretary will review such timeframes 
annually and, as the Secretary deems necessary, publish in the Federal 
Register a table setting forth the timeframes and methods the Secretary 
determines to be reasonable. The schedule will reflect the timeframe 
allowed for the standard, acceptable method for foreclosure proceedings 
in each State. The use of another method will require prior approval 
from VA. VA will maintain the loan termination time allowable 
timeframes on a Web site under VA's control, such as at http://www.homeloans.va.gov.
    (b)(1) At least 30 days prior to the scheduled or anticipated date 
of the liquidation sale, the holder must request that VA assign an 
appraiser to conduct a liquidation appraisal.
    (2) If the holder (or its authorized servicing agent) has been 
approved by the Secretary to process liquidation appraisals under 38 
CFR 36.4848, the appraiser shall forward the liquidation appraisal 
report directly to the holder for a determination of the fair market 
value of the property pursuant to Sec.  36.4848.
    (3) If the holder (or its authorized servicing agent) has not been 
approved by the Secretary to process liquidations appraisals under 38 
CFR 36.4848, the Secretary shall review the appraisal and determine the 
fair market value of the property. The Secretary will provide the 
holder with a statement of the fair market value.
    (4)(i) Except as provided in paragraph (b)(4)(ii) of this section, 
a liquidation appraisal or statement of fair market value issued 
pursuant to paragraph (b)(3) of this section will be valid for 180 
calendar days.
    (ii) The Secretary may specify in writing a shorter validity 
period, not less than 90 calendar days, for a liquidation appraisal or 
statement of fair market value if rapidly-changing market conditions in 
the area where the property is located make such shorter validity 
period in the best fiscal interests of the United States.
    (c) Prior to the liquidation sale, the holder shall compute the net 
value of the property securing the guaranteed loan by subtracting the 
estimated costs to the Secretary for the acquisition and disposition of 
the property from the fair market value, as determined under paragraph 
(b) of this section. Those costs will be calculated using the 
percentage derived by the Secretary and published in the Federal 
Register pursuant to Sec.  36.4801.
    (d) If the holder learns of any material damage to the property 
occurring after the appraisal and prior to the liquidation sale, the 
impact of such damage on the fair market value must be determined in 
consultation with the fee appraiser, and the net value adjusted 
accordingly.
    (e)(1) A holder may approve a compromise sale of the property 
securing the loan without the prior approval of the Secretary provided 
that:
    (i) The holder has determined the loan is insoluble;
    (ii) The credit to the indebtedness (consisting of the net proceeds 
from the compromise sale and any waiver of indebtedness by the holder) 
must equal or exceed the net value of the property securing the loan; 
and
    (iii) The current owner of the property securing the loan will not 
receive any proceeds from the sale of the property.
    (2) A holder may request advance approval from the Secretary for a 
compromise sale notwithstanding that all of the conditions specified in 
paragraph (e)(1) of this section cannot be met if the holder believes 
such compromise sale would be in the best interests of the veteran and 
the Secretary.
    (f)(1) A holder may accept a deed voluntarily tendered by the 
current owner of the property securing the loan in lieu of conducting a 
foreclosure without the prior approval of the Secretary provided that:
    (i) The holder has determined the loan is insoluble;
    (ii) The holder has computed the net value of the property securing 
the loan pursuant to paragraph (c) of this section;
    (iii) The holder has considered a compromise sale pursuant to 
paragraph (e) of this section and determined such compromise sale is 
not practical; and,
    (iv) The holder has determined the current owner of the property 
can convey clear and marketable title to the property that would meet 
the standard stated in paragraph (d)(5) of Sec.  36.4823.
    (2) A holder may request advance approval from the Secretary for a 
deed-in-lieu of foreclosure notwithstanding that all of the conditions 
specified in paragraph (f)(1) of this section cannot be met if the 
holder believes such deed-in-lieu would be in the best interests of the 
veteran and the Secretary.

(Authority: 38 U.S.C. 3703(c), 3732)


Sec.  36.4823  Election to convey security.

    (a) If the holder acquires the property that secured the guaranteed 
loan at the liquidation sale or through acceptance of a deed-in-lieu of 
foreclosure and if, under 38 U.S.C. 3732(c), the Secretary may accept 
conveyance of the property,

[[Page 6329]]

the holder must notify the Secretary by electronic means no later than 
15 calendar days after the date of liquidation sale (i.e., the event 
which fixes the rights of the parties in the property, such as the date 
of foreclosure sale, date of recordation of a deed-in-lieu of 
foreclosure, or confirmation/ratification of sale date when required 
under local practice) that the holder elects to convey the property to 
the Secretary. The Secretary will not accept conveyance of the property 
if the holder fails to notify the Secretary of its election within such 
15 calendar days. In computing the eligible indebtedness under 38 
U.S.C. 3732(c), the holder may follow the alternative procedure 
described in paragraph (b) of this section.
    (b) If the calculation by the holder shows that the net value is 
equal to or less than the unguaranteed portion of the loan (i.e., the 
total indebtedness minus VA's maximum claim payable under the 
guaranty), this would preclude conveyance under 38 U.S.C. 3732(c). 
However, the holder may desire to convey the property to VA and may 
decide to waive a portion of the indebtedness to the extent that the 
property may be conveyed under 38 U.S.C. 3732(c). In such a case, the 
holder must provide the notice described in paragraph (a) of this 
section, and must subsequently waive that portion of the total 
indebtedness remaining after application of the net value amount and 
VA's guaranty claim payment. The holder must send the borrower(s) a 
notice describing the amount of indebtedness that has been waived no 
later than 15 calendar days after receipt of the guaranty claim.
    (c) The holder, in accounting to the Secretary in connection with 
the conveyance of any property pursuant to this section, may include as 
a part of the indebtedness all actual expenses or costs of the 
proceedings, paid by the holder, within the limits defined in Sec.  
36.4814. In connection with the conveyance or transfer of property to 
the Secretary the holder may include in accounting to the Secretary the 
following expense items if actually paid by the holder, in addition to 
the consideration payable for the property under 38 U.S.C. 3732(c):
    (1) State and documentary stamp taxes as may be required.
    (2) Amount expended for taxes, special assessments, including such 
payments which are specified in paragraph (d)(4) of this section.
    (3) Recording fees.
    (4) Any other expenditures in connection with the property which 
are approved by the Secretary, including, but not limited to, the cost 
of a title policy insuring title in the name of the Secretary of 
Veterans Affairs.
    (d) The conveyance or transfer of any property to the Secretary 
pursuant to this section shall be subject to the following provisions:
    (1) The notice of the holder's election to convey the property to 
the Secretary shall state the amount of the holder's successful bid and 
shall state the insurance coverage then in force, specifying for each 
policy, the name of the insurance company, the hazard covered, the 
amount, and the expiration date. With respect to a voluntary conveyance 
to the holder in lieu of foreclosure, the amount of the holder's 
successful bid shall be deemed to be the lesser of the net value of the 
property or the total indebtedness.
    (2) Coincident with the notice of election to convey or transfer 
the property to the Secretary or with the acquisition of the property 
by the holder, following such notice, whichever is later, the holder 
shall request endorsements on all insurance policies naming the 
Secretary as an assured, as his/her interest may appear. Such insurance 
policies shall be forwarded to the Secretary at the time of the 
conveyance or transfer of the property to the Secretary or as soon 
after that time as feasible. If insurers cancel policies, holders must 
properly account for any unearned premiums refunded by the insurer.
    (3) Occupancy of the property by anyone properly in possession by 
virtue of and during a period of redemption, or by anyone else unless 
under a claim of title which makes the title sought to be conveyed by 
the holder of less dignity or quality than that required by this 
section, shall not preclude the holder from conveying or transferring 
the property to the Secretary. Except with the prior approval of the 
Secretary, the holder shall not rent the property to a new tenant, nor 
extend the term of an existing tenancy on other than a month-to-month 
basis.
    (4) The notice shall provide property tax information to include 
all taxing authority property identification numbers. Any taxes, 
special assessments or ground rents due and payable within 30 days 
after date of conveyance or transfer to the Secretary must be paid by 
the holder.
    (5)(i) Each conveyance or transfer of real property to the 
Secretary pursuant to this section shall be acceptable if:
    (A) The holder thereby covenants or warrants against the acts of 
the holder and those claiming under the holder (e.g., by special 
warranty deed); and
    (B) It vests in the Secretary or will entitle the Secretary to such 
title as is or would be acceptable to prudent lending institutions, 
informed buyers, title companies, and attorneys, generally, in the 
community in which the property is situated.
    (ii) Any title will not be unacceptable to the Secretary by reason 
of any of the limitations on the quantum or quality of the property or 
title stated in Sec.  36.4854(b), Provided, that:
    (A) At the time of conveyance or transfer to the Secretary there 
has been no breach of any conditions affording a right to the exercise 
of any reverter.
    (B) With respect to any such limitations which came into existence 
subsequent to the making of the loan, full compliance was had with the 
requirements of Sec.  36.4827.
    (iii) The acceptability of a conveyance or transfer pursuant to the 
requirements of this paragraph will generally be established by 
delivery to the Secretary of the following evidence of title showing 
that title to the property of the quality specified in this paragraph 
(d)(5) is or will be vested in the Secretary:
    (A) A copy of the deed or document evidencing transfer of interest 
and title at the liquidation sale;
    (B) A special warranty deed conveying the property to the 
Secretary;
    (C) Origination Deed of Trust or Mortgage;
    (D) Original or Copy of Mortgagee's Title Insurance Policy from 
Loan Origination (except in Iowa, where a title abstract is required);
    (E) Owner's Title Insurance Policy issued after loan termination in 
the name of the Secretary (except in Iowa, where a title abstract is 
required);
    (F) Loan Assignments;
    (G) Appointment of Substitute Trustee (where required as part of 
the termination process);
    (H) Estoppel Affidavit for deed in lieu of foreclosure, if required 
by State law and appropriate language cannot be included in the deed in 
lieu of foreclosure; and/or
    (I) Any evidence that the Secretary may reasonably require.
    (iv) In lieu of such title evidence listed in paragraph (d)(5)(iii) 
of this section, the Secretary will accept a conveyance or transfer 
with general warranty with respect to the title from a holder described 
in 38 U.S.C. 3702(d) or from a holder of financial responsibility 
satisfactory to the Secretary.
    (6) Except with respect to matters covered by any covenants or 
warranties of the holder, the acceptance by the Secretary of a 
conveyance or transfer by the holder shall conclude the

[[Page 6330]]

responsibility of the holder to the Secretary under the regulations of 
this subpart with respect to the title. In the event of the subsequent 
discovery of title defects, the Secretary shall have no recourse 
against the holder with respect to such title other than by reason of 
such covenants or warranties.
    (7) As between the holder and the Secretary, the responsibility for 
any loss due to damage to or destruction of the property or due to 
personal injury sustained in respect to such property shall be governed 
by the provisions of this paragraph and paragraph (d)(11) of this 
section. Ordinary wear and tear excepted, the holder shall bear such 
risk of loss from the date of acquisition by the holder to the date 
such risk of loss is assumed by the Secretary. Such risk of loss is 
assumed by the Secretary from the date of receipt of the holder's 
election to convey or transfer the property to the Secretary. The 
amount of any loss chargeable to the holder may be deducted from the 
amount payable by the Secretary at the time the property is 
transferred. In any case where pursuant to the VA regulations rejection 
of the title is legally proper, the Secretary may surrender custody of 
the property as of the date specified in the Secretary's notice to the 
holder. The Secretary's assumption of such risk shall terminate upon 
such surrender.
    (8) The conveyance should be made to ``Secretary of Veterans 
Affairs, an Officer of the United States.'' The name of the incumbent 
Secretary should not be included unless State law requires naming a 
real person.
    (9) The holder shall not be liable to the Secretary for any portion 
of the paid or unpaid taxes, special assessments, ground rents, 
insurance premiums, or other similar items. The holder shall be liable 
to the Secretary for all penalties and interest associated with taxes 
not timely paid by the holder prior to conveyance.
    (10) The Secretary shall be entitled to all rentals and other 
income collected from the property and to any insurance proceeds or 
refunds subsequent to the date of acquisition by the holder.
    (11) In respect to a property which was the security for a 
condominium loan guaranteed or insured under 38 U.S.C. 3710(a)(6) the 
responsibility for any loss due to damage to or destruction of the 
property or due to personal injury sustained in respect to such 
property shall in no event pass to the Secretary until the Secretary 
expressly assumes such responsibility or until conveyance of the 
property to the Secretary, whichever first occurs. The holder shall 
have the right to convey such property to the Secretary only if the 
property (including elements of the development or project owned in 
common with other unit owners) is undamaged by fire, earthquake, 
windstorm, flooding or boiler explosion. The absence of a right in the 
holder to convey such property which is so damaged shall not preclude a 
conveyance, if the Secretary agrees in a given case to such a 
conveyance upon completion of repairs within a specified period of time 
and such repairs are so completed and the conveyance is otherwise in 
order.
    (e) Except as provided in paragraph (d)(6) of this section, the 
provisions of this section shall not be in derogation of any rights 
which the Secretary may have under Sec.  36.4828. The Under Secretary 
for Benefits, or the Director, Loan Guaranty Service, may authorize any 
deviation from the provisions of this section, within the limitations 
prescribed in 38 U.S.C. chapter 37, which may be necessary or desirable 
to accomplish the objectives of this section if such deviation is made 
necessary by reason of any laws or practice in any State or Territory 
or the District of Columbia, Provided, that no such deviation shall 
impair the rights of any holder not consenting to the deviation with 
respect to loans made or approved prior to the date the holder is 
notified of such action.

(Authority: 38 U.S.C. 3720, 3732)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0381.)


Sec.  36.4824  Guaranty claims; subsequent accounting.

    (a) Subject to the limitation that the total amounts payable shall 
in no event exceed the amount originally guaranteed, or in the case of 
a modified loan, such amount as may have been increased under the 
provisions of Sec.  36.4815(h)(2), the amount payable on a claim for 
the guaranty shall be the percentage of the loan originally guaranteed, 
or the percentage as adjusted under Sec.  36. 4815(h)(2), whichever is 
applicable, applied to the sum of:
    (1) The unpaid principal as of the date of the liquidation sale;
    (2) Allowable expenses/advances as described in Sec.  36.4814; and
    (3) The lesser of:
    (i) The unpaid interest as of the date of the liquidation sale; or
    (ii) The unpaid interest for the reasonable period that the 
Secretary has determined, pursuant to Sec.  36.4822(a), it should have 
taken to complete the foreclosure, plus 210 days from the due date of 
the last paid installment. This amount will be increased if the 
Secretary determines the holder was unable to complete the foreclosure 
within the time specified in this paragraph due to Bankruptcy 
proceedings, appeal of the foreclosure by the debtor, the holder 
granting forbearance in excess of 30 days at the request of the 
Secretary, or other factors beyond the control of the holder.
    (b) Deposits or other credits or setoffs legally applicable to the 
indebtedness shall be applied in reduction of the indebtedness on which 
the claim is based. Any escrowed or earmarked funds not subject to 
superior claims of third persons must likewise be so applied.
    (c)(1) Credits accruing from the proceeds of a liquidation sale 
shall be reported to the Secretary incident to claim submission, and 
the amount payable on the claim shall in no event exceed the remaining 
balance of the indebtedness.
    (2) The amount payable under the guaranty shall be computed 
applying the formulae in 38 U.S.C. 3732(c). With respect to a voluntary 
conveyance to the holder in lieu of foreclosure, the holder shall be 
deemed to have acquired the property at the liquidation sale for the 
lesser of the net value of the property or the total indebtedness.
    (d)(1)(i) Except as provided in paragraph (d)(1)(ii) of this 
section, holders shall file a claim for payment under the guaranty 
electronically no later than 1 year after the completion of the 
liquidation sale. For purposes of this section, the liquidation sale 
will be considered completed when:
    (A) The last act required under State law is taken to make the 
liquidation sale final, but excluding any redemption period permitted 
under State law;
    (B) If a holder accepts a voluntary conveyance of the property in 
lieu of foreclosure, the date of recordation of the deed to the holder 
or the holder's designee; or
    (C) In the case of a sale of the property to a third party for an 
amount less than is sufficient to repay the unpaid balance on the loan 
where the holder has agreed in advance to release the lien in exchange 
for the proceeds of such sale, the date of settlement of such sale.
    (ii) With respect to any liquidation sale completed prior to 
February 1, 2008, all claims must be submitted no later than February 
2, 2009.
    (2) If additional information becomes known to a holder after the 
filing of a guaranty claim, the holder may file a supplemental claim 
provided that such supplemental claim is filed within the time period 
specified in paragraph (d)(1) of this section.

[[Page 6331]]

    (3) No claim under a guaranty shall be payable unless it is 
submitted within the time period specified in paragraph (d)(1) of this 
section.
    (4) A claim shall be submitted to VA electronically on the VA Loan 
Electronic Reporting Interface system.
    (5) Supporting documents will not be submitted with the claim, but 
must be retained by the servicer and are subject to inspection as 
provided in Sec.  36.4833 of this title.
    (e) In the event that VA does not approve payment of any item 
submitted under a guaranty claim, VA shall notify the holder 
electronically what items are being denied and the reasons for such 
denial. The holder may, within 30 days after the date of such denial 
notification, submit an electronic request to VA that one or more items 
that were denied be reconsidered. The holder must present any 
additional information justifying payment of items denied.

(Authority: 38 U.S.C. 3703(c), 3720, 3732)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0362.)


Sec.  36.4825  Computation of indebtedness.

    In computing the indebtedness for the purpose of filing a claim for 
payment of a guaranty or for payment of an insured loss, or in the 
event of a transfer of the loan under Sec.  36.4820(a), or other 
accounting to the Secretary, the holder shall not be entitled to treat 
repayments theretofore made as liquidated damages, or rentals, or 
otherwise than as payments on the indebtedness, notwithstanding any 
provision in the note, or mortgage, or otherwise, to the contrary.

(Authority: 38 U.S.C. 3703(c), 3720, 3732)


Sec.  36.4826  Subrogation and indemnity.

    (a) The Secretary shall be subrogated to the contract and the lien 
or other rights of the holder to the extent of any sum paid on a 
guaranty or on account of an insured loss, which right shall be junior 
to the holder's rights as against the debtor or the encumbered property 
until the holder shall have received the full amount payable under the 
contract with the debtor. No partial or complete release by a creditor 
shall impair the rights of the Secretary with respect to the debtor's 
obligation.
    (b) The holder, upon request, shall execute, acknowledge and 
deliver an appropriate instrument tendered for that purpose, evidencing 
any payment received from the Secretary and the Secretary's resulting 
right of subrogation.
    (c) The Secretary shall cause the instrument required by paragraph 
(b) of this section to be filed for record in the office of the 
recorder of deeds, or other appropriate office of the proper county, 
town or State, in accordance with the applicable State law. The filing 
or failure to file such instrument for record shall have the legal 
results prescribed by the applicable law of the State where the real or 
personal property is situated, with respect to filing or failure to so 
file mortgages and other lien instruments and assignments thereof. The 
references herein to ``filing for record'' include ``registration'' or 
any similar transaction, by whatever name designated when title to the 
encumbered property has been ``registered'' pursuant to a Torrens or 
other similar title registration system provided by law.
    (d) As a condition to paying a claim for an insured loss the 
Secretary may require that the loan, including any security or judgment 
held therefor, be assigned to the extent of such payment, and if any 
claim has been filed in bankruptcy, insolvency, probate, or similar 
proceedings such claim may likewise be required to be so assigned.
    (e) Any amounts paid by the Secretary on account of the liabilities 
of any veteran guaranteed or insured under the provisions of 38 U.S.C. 
chapter 37 shall constitute a debt owing to the United States by such 
veteran. Before a liquidation sale, an official authorized to act for 
the Secretary under provisions of Sec.  36.4845 may approve a complete 
or partial release of the Secretary's right to collect a debt owing to 
the United States under this paragraph and/or under paragraph (a) of 
this section as follows:
    (1) Complete release. VA will approve a complete release if an 
official authorized to act for the Secretary under Sec.  36.4845 
determines that all of the following are true:
    (i) The loan default was caused by circumstances beyond the control 
of the obligor; and
    (ii) There are no indications of fraud, misrepresentation or bad 
faith on the part of the obligor in obtaining the loan or in connection 
with the loan default; and
    (iii) The obligor cooperated with VA in exploring all realistic 
alternatives to termination of the loan through foreclosure, and, 
either:
    (A) Review of the obligor's current financial situation and 
prospective earning potential and obligations indicates there are no 
realistic prospects that the obligor could repay all or part of the 
anticipated debt within six years after the liquidation sale and still 
provide the necessities of life for himself or herself and his or her 
family; or,
    (B) In consideration for a release of the Secretary's collection 
rights the obligor completes, or VA is enabled to authorize, an action 
which reduces the Government's claim liability sufficiently to offset 
the amount of the anticipated indebtedness which would otherwise be 
established pursuant to this paragraph and likely be collectable by VA 
after foreclosure in view of the obligor's financial situation. Such 
actions would include termination of the loan by means of a deed-in-
lieu of foreclosure, private sale of the property for less than the 
indebtedness with a reduced claim paid by VA for the balance due the 
loan holder, or enabling VA to authorize the holder to elect a more 
expeditious foreclosure procedure when such an election would result in 
the legal release of the obligor's liability; or
    (C) The obligor being released is not the current titleholder to 
the property and there are no indications of fraud, misrepresentation, 
or bad faith on the obligor's part in disposing of the property.
    (2) Partial release. In the event of a partial release, the amount 
of indebtedness established will be such that the obligor's financial 
situation permits repayment of the debt to the Government in regular 
monthly installments of principal plus interest over a five year period 
commencing within one year after the date the promissory note is 
executed, except in those cases in which a lump sum settlement appears 
to be in the best interest of the Government or in which it appears the 
obligor may reasonably expect significant changes in his or her 
financial situation which would permit higher payments to be made 
during later periods of the life of the note. VA may authorize a 
partial release if an official authorized to act for the Secretary 
under Sec.  36.4845 determines that all of the following are true:
    (i) The loan default was caused by circumstances beyond the control 
of the obligor; and,
    (ii) There are no indications of fraud, misrepresentation or bad 
faith on the part of the obligor in obtaining the loan or in connection 
with the loan default; and,
    (iii) The obligor cooperated with VA in exploring all realistic 
alternatives to termination of the loan through foreclosure; and,
    (iv) Review of the obligor's current financial situation and 
prospective earning potential and obligations indicates there are no 
realistic prospects that the obligor could repay all of the anticipated 
debt within six years of the liquidation sale while providing the

[[Page 6332]]

necessities of life for himself or herself and his or her family; and,
    (v) The obligor executes a written agreement acknowledging his or 
her liability to VA under this paragraph and executes a promissory note 
which provides for regular amortized monthly payments of an amount 
determined by VA in accordance with paragraph (e)(3) of this section 
including interest on the total amount payable at the rate in effect 
for Loan Guaranty liability accounts at the time of execution, or, the 
obligor agrees to other terms of repayment acceptable to VA including 
payment of a lump sum in settlement of his or her obligation under this 
paragraph.
    (3) Review of obligor's financial situation. For purposes of 
authorizing a complete or partial release under this paragraph, a VA 
official reviewing an obligor's financial situation will consider all 
of the following:
    (i) The obligor's current and anticipated family income based on 
employment skills and experience;
    (ii) The obligor's current short-term and long-term financial 
obligations, including the obligation to repay the Government which 
must be afforded consideration at least equal to his or her consumer 
debt obligations;
    (iii) A current credit report on the obligor;
    (iv) The obligor's assets and net worth; and
    (v) The required balance available for family support used in 
underwriting VA guaranteed loans in the area.
    (4) Determinations made under paragraphs (e)(1) and (2) of this 
section are intended for the benefit of the Government in reducing the 
amount of claim payable by VA and/or avoiding the establishment of 
uncollectible debts owing to the United States. Such determinations are 
discretionary on the part of VA and shall not constitute a defense to 
any legal action to terminate the loan nor vest any appellate right in 
an obligor which would require further review of the case.

(Authority: 38 U.S.C. 501, 3703(c)(1), 5302)

    (f) Whenever any veteran disposes of residential property securing 
a guaranteed or insured loan obtained by him or her under 38 U.S.C. 
chapter 37, and for which the commitment to make the loan was made 
prior to March 1, 1988, the Secretary, upon application made by such 
veteran, shall issue to the veteran a release relieving him or her of 
all further liability to the Secretary on account of such loan 
(including liability for any loss resulting from any default of the 
transferee or any subsequent purchaser of such property) if the 
Secretary has determined, after such investigation as may be deemed 
appropriate, that there has been compliance with the conditions 
prescribed in 38 U.S.C. 3713. The assumption of full liability for 
repayment of the loan by the transferee of the property must be 
evidenced by an agreement in writing in such form as the Secretary may 
require. Release of the veteran from liability to the Secretary will 
not impair or otherwise affect the Secretary's guaranty or insurance 
liability on the loan, or the liability of the veteran to the holder. 
Any release of liability granted to a veteran by the Secretary shall 
inure to the spouse of such veteran. The release of the veteran from 
liability to the Secretary will constitute the Secretary's prior 
approval to a release of the veteran from liability on the loan by the 
holder thereof.

(Authority: 38 U.S.C. 3713)

    (g) If any veteran disposes of residential property securing a 
guaranteed or insured loan obtained under 38 U.S.C. chapter 37, without 
receiving a release from liability with respect to such loan under 38 
U.S.C. 3713 and a default subsequently occurs which results in 
liability of the veteran to the Secretary on account of the loan, the 
Secretary may relieve the veteran of such liability if he determines 
that:
    (1) A transferee either immediate or remote is legally liable to 
the Secretary for the debt of the original veteran-borrower established 
after the termination of the loan, and
    (2) The original loan was current at the time such transferee 
acquired the property, and
    (3) The transferee who is liable to the Secretary is found to have 
been a satisfactory credit risk at the time he or she acquired the 
property.
    (h)(1) If a veteran or any other person disposes of residential 
property securing a guaranteed or insured loan for which a commitment 
was made on or after March 1, 1988, and the veteran or other person 
notifies the loan holder in writing before disposing of the property, 
the veteran or other person shall be relieved of all further liability 
to the Secretary with respect to the loan (including liability for any 
loss resulting from any default of the purchaser or any subsequent 
owner of the property) and the application for assumption shall be 
approved if the holder determines that:
    (i) The proposed purchaser is creditworthy;
    (ii) The proposed purchaser is contractually obligated to assume 
the loan and the liability to indemnify the Department of Veterans 
Affairs for the amount of any claim paid under the guaranty as a result 
of a default on the loan, or has already done so; and
    (iii) The payments on the loan are current.
    (2) Should these requirements be satisfied, the holder may also 
release the veteran or other person from liability on the loan. This 
does not apply if the approval for the assumption is granted upon 
special appeal to avoid immediate foreclosure.
    (i) If a veteran requests a release of liability under paragraph 
(f) of this section, or if a borrower requests a release of liability 
pursuant to Sec.  36.4809(c)(1)(vii), a holder described in the first 
sentence of Sec.  36.4803(l)(1)(i) is authorized to and must make all 
decisions regarding the credit-worthiness of the transferee, subject to 
the right of a transferee to appeal any denial to the Secretary within 
30 days of being notified in writing of the denial by the holder or 
servicer. The procedures and fees specified in Sec. Sec.  
36.4803(l)(1)(i) and 36.4813(d)(8) applicable to decisions under 38 
U.S.C. 3714 shall also apply to decisions specified in this paragraph.

(Authority: 38 U.S.C. 3703(c), 3713 and 3714)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0112.)


Sec.  36.4827  Release of security.

    (a)(1) Except upon full payment of the indebtedness, or except as 
provided in paragraph (a)(2) of this section or in paragraphs (e) and 
(f) of Sec.  36.4822, the holder shall not release a lien or other 
right in or to real property held as security for a guaranteed or 
insured loan, or grant a fee or other interest in such property, 
without prior approval of the Secretary.
    (2) The holder may, without the prior approval of the Secretary, 
release the lien on a portion of the property securing the loan 
provided:
    (i) The holder has obtained an appraisal from the Secretary showing 
the value of the security prior to the partial release of the lien and 
the value of the security on which the lien will remain;
    (ii) The portion of the property still subject to the lien is fit 
for dwelling purposes; and
    (iii) The loan-to-value ratio after the partial release of the 
lien:
    (A) Will be not more than 80 percent; or
    (B) If the loan-to-value ratio after the partial release of the 
lien is 80 percent or higher, any proceeds received as consideration 
from the partial release of the lien shall be applied to the unpaid 
loan balance.

[[Page 6333]]

    (b) A holder may release from the lien personal property including 
crops without the prior approval of the Secretary.
    (c) Failure of the holder to comply with the provisions of this 
section shall not in itself affect the validity of the title of a 
purchaser to the property released.
    (d) The release of the personal liability of any obligor on a 
guaranteed or insured obligation resultant from the act or omission of 
any holder without the prior approval of the Secretary shall release 
the obligation of the Secretary as guarantor or insurer, except when 
such act or omission consists of:
    (1) Failure to establish the debt as a valid claim against the 
assets of the estate of any deceased obligor, provided no lien for the 
guaranteed or insured debt is thereby impaired or destroyed; or
    (2) An election and appropriate prosecution of legally available 
effective remedies with respect to the repossession or the liquidation 
of the security in any case, irrespective of the identity or the 
survival of the original or of any subsequent debtor, if holder shall 
have given such notice as required by Sec.  36.4817 and if, after 
receiving such notice, the Secretary shall have failed to notify the 
holder within 15 days to proceed in such manner as to effectively 
preserve the personal liability of the parties liable, or such of them 
as the Secretary indicates in such notice to the holder; or
    (3) The release of an obligor, or obligors, from liability on an 
obligation secured by a lien on property, which release is an incident 
of and contemporaneous with the sale of such property to an eligible 
veteran who assumed such obligation, which assumed obligation is 
guaranteed on the assuming veteran's account pursuant to 38 U.S.C. 
chapter 37; or
    (4) The release of an obligor or obligors as provided in Sec.  
36.4815; or, the release of an obligor, or obligors, incident to the 
sale of property securing the loan which the holder is authorized to 
approve under the provisions of 38 U.S.C. 3714.

(Authority: 38 U.S.C. 3714)


Sec.  36.4828  Partial or total loss of guaranty or insurance.

    (a) Subject to the incontestable provisions of 38 U.S.C. 3721 as to 
loans guaranteed or insured on or subsequent to July 1, 1948, there 
shall be no liability on account of a guaranty or insurance, or any 
certificate or other evidence thereof, with respect to a transaction in 
which a signature to the note, the mortgage, or any other loan papers, 
or the application for guaranty or insurance is a forgery; or in which 
the certificate of discharge or the certificate of eligibility is 
counterfeited, or falsified, or is not issued by the Government.
    (1) Except as to a holder who acquired the loan instrument before 
maturity, for value, and without notice, and who has not directly or by 
agent participated in the fraud, or in the misrepresentation 
hereinafter specified, any willful and material misrepresentation or 
fraud by the lender, or by a holder, or the agent of either, in 
procuring the guaranty or the insurance credit, shall relieve the 
Secretary of liability, or, as to loans guaranteed or insured on, or 
subsequent to July 1, 1948, shall constitute a defense against 
liability on account of the guaranty or insurance of the loan in 
respect to which the willful misrepresentation, or the fraud, is 
practiced: Provided, that if a misrepresentation, although material, is 
not made willfully, or with fraudulent intent, it shall have only the 
consequences prescribed in paragraphs (b) and (c) of this section.
    (2) [Reserved]
    (b) In taking security required by 38 U.S.C. chapter 37 and the 
regulations concerning guaranty or insurance of loans to veterans, a 
holder shall obtain the required lien on property the title to which is 
such as to be acceptable to prudent lending institutions, informed 
buyers, title companies, and attorneys, generally, in the community in 
which the property is situated: Provided, that a title will not be 
unacceptable by reason of any of the limitations on the quantum or 
quality of the property or title stated in Sec.  36.4854(b) and if such 
holder fails in this respect or fails to comply with 38 U.S.C. chapter 
37 and the regulations concerning guaranty or insurance of loans to 
veterans, then no claim on the guaranty or insurance shall be paid on 
account of the loan with respect to which such failure occurred, or in 
respect to which an unwillful misrepresentation occurred, until the 
amount by which the ultimate liability of the Secretary would thereby 
be increased has been ascertained. The burden of proof shall be upon 
the holder to establish that no increase of ultimate liability is 
attributable to such failure or misrepresentation. The amount of 
increased liability of the Secretary shall be offset by deduction from 
the amount of the guaranty or insurance otherwise payable, or if 
consequent upon loss of security shall be offset by crediting to the 
indebtedness the amount of the impairment as proceeds of the sale of 
security in the final accounting to the Secretary. To the extent the 
loss resultant from the failure or misrepresentation prejudices the 
Secretary's right of subrogation acceptance by the holder of the 
guaranty or insurance payment shall subordinate the holder's right to 
those of the Secretary. Adjustments under this section may be made for 
failure to comply with:
    (1) Obtaining and retaining a lien of the dignity prescribed on all 
property upon which a lien is required by 38 U.S.C. chapter 37 or the 
regulations concerning guaranty or insurance of loans to veterans,
    (2) Inclusion of power to substitute trustees (Sec.  36.4830),
    (3) The procurement and maintenance of insurance coverage (Sec.  
36.4829),
    (4) Any notice required by Sec.  36.4817,
    (5) The release, conveyance, substitution, or exchange of security 
(Sec.  36.4827),
    (6) Lack of legal capacity of a party to the transaction incident 
to which the guaranty or the insurance is granted (Sec.  36.4831),
    (7) Failure of the lender to see that any escrowed or earmarked 
account is expended in accordance with the agreement,
    (8) The taking into consideration of limitations upon the quantum 
or quality of the estate or property (Sec.  36.4854(b)),
    (9) Any other requirement of 38 U.S.C. chapter 37 or the 
regulations concerning guaranty or insurance of loans to veterans which 
does not by the terms of said chapter or the regulations concerning 
guaranty or insurance of loans to veterans result in relieving the 
Secretary of all liability with respect to the loan,
    (c) If after the payment of a guaranty or an insurance loss, or 
after a loan is transferred pursuant to Sec.  36.4820(a), the fraud, 
misrepresentation or failure to comply with the regulations in this 
subpart as provided in this section is discovered and the Secretary 
determines that an increased loss to the government resulted therefrom 
the transferor or person to whom such payment was made shall be liable 
to the Secretary for the amount of the loss caused by such 
misrepresentation or failure.

(Authority: 38 U.S.C. 3703 and 3720)


Sec.  36.4829  Hazard insurance.

    The holder shall require insurance policies to be procured and 
maintained in an amount sufficient to protect the security against the 
risks or hazards to which it may be subjected to the extent customary 
in the locality. All moneys received under such policies covering 
payment of insured losses shall be applied to restoration of the 
security or to the loan balance. Flood insurance will be required on 
any building or

[[Page 6334]]

personal property securing a loan at any time during the term of the 
loan that such security is located in an area identified by the Federal 
Emergency Management Agency as having special flood hazards and in 
which flood insurance has been made available under the National Flood 
Insurance Act, as amended. The amount of flood insurance must be at 
least equal to the lesser of the outstanding principal balance of the 
loan or the maximum limit of coverage available for the particular type 
of property under the National Flood Insurance Act, as amended. The 
Secretary cannot guarantee a loan for the acquisition or construction 
of property located in an area identified by the Federal Emergency 
Management Agency as having special flood hazards unless the community 
in which such area is situated is then participating in the National 
Flood Insurance Program.

(Authority: 38 U.S.C. 3703(c)(1), 42 U.S.C. 4106(a))


Sec.  36.4830  Substitution of trustees.

    In jurisdictions in which valid, any deed of trust or mortgage 
securing a guaranteed or insured loan, if it names trustees, or confers 
a power of sale otherwise, shall contain a provision empowering any 
holder of the indebtedness to appoint substitute trustees, or other 
person with such power to sell, who shall succeed to all the rights, 
powers and duties of the trustees, or other person, originally 
designated.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4831  Capacity of parties to contract.

    Nothing in Sec. Sec.  36.4800 through 36.4880 shall be construed to 
relieve any lender of responsibility otherwise existing, for any loss 
caused by the lack of legal capacity of any person to contract, convey, 
or encumber, or caused by the existence of other legal disability or 
defects invalidating, or rendering unenforceable in whole or in part, 
either the loan obligation or the security therefor.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4832  Geographical limits.

    Any real property purchased, constructed, altered, improved, or 
repaired with the proceeds of a guaranteed or insured loan shall be 
situated within the United States which for purposes of 38 U.S.C. 
chapter 37 is here defined as the several States, Territories and 
possessions, and the District of Columbia, the Commonwealth of Puerto 
Rico, and the Commonwealth of the Northern Mariana Islands.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4833  Maintenance of records.

    (a)(1) The holder shall maintain a record of the amounts of 
payments received on the obligation and disbursements chargeable 
thereto and the dates thereof, including copies of bills and receipts 
for such disbursements. These records shall be maintained until the 
Secretary ceases to be liable as guarantor or insurer of the loan, or, 
if the Secretary has paid a claim on the guaranty, until 3 years after 
such claim was paid. For the purpose of any accounting with the 
Secretary or computation of a claim, any holder who fails to maintain 
such record and, upon request, make it available to the Secretary for 
review shall be presumed to have received on the dates due all sums 
which by the terms of the contract are payable prior to date of claim 
for default, or to have not made the disbursement for which 
reimbursement is claimed, and the burden of going forward with evidence 
and of ultimate proof of the contrary shall be on such holder.
    (2) The holder shall maintain records supporting their decision to 
approve any loss mitigation option for which an incentive is paid in 
accordance with Sec.  36.4819(a). Such records shall be retained a 
minimum of 3 years from the date of such incentive payment and shall 
include, but not be limited to, credit reports, verifications of 
income, employment, assets, liabilities, and other factors affecting 
the obligor's credit worthiness, work sheets, and other documents 
supporting the holder's decision.
    (3) For any loan where the claim on the guaranty was paid on or 
after February 1, 2008, or action described in paragraph (a)(2) of this 
section was taken after February 1, 2008, holders shall submit any 
documents described in paragraph (a)(1) or (a)(2) of this section to 
the Secretary in electronic form; i.e., an image of the original 
document in .jpg, .gif, .pdf, or a similar widely accepted format.
    (b) The lender shall retain copies of all loan origination records 
on a VA-guaranteed loan for at least two years from the date of loan 
closing. Loan origination records include the loan application, 
including any preliminary application, verifications of employment and 
deposit, all credit reports, including preliminary credit reports, 
copies of each sales contract and addendums, letters of explanation for 
adverse credit items, discrepancies and the like, direct references 
from creditors, correspondence with employers, appraisal and compliance 
inspection reports, reports on termite and other inspections of the 
property, builder change orders, and all closing papers and documents.

(Authority: 38 U.S.C. 501, 3703(c)(1))

    (c) The Secretary has the right to inspect, examine, or audit, at a 
reasonable time and place, the records or accounts of a lender or 
holder pertaining to loans guaranteed or insured by the Secretary.

(Authority: 38 U.S.C. 3703(c)(1))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0515.)


Sec.  36.4835  Delivery of notice.

    Except where otherwise specified in this part, any notice required 
by Sec. Sec.  36.4800 to 36.4880 to be given the Secretary must be in 
writing or such other communications medium as may be approved by an 
official designated in Sec.  36.4845 and delivered, by mail or 
otherwise, to the VA office at which the guaranty or insurance was 
issued, or to any changed address of which the holder has been given 
notice. Such notice must plainly identify the case by setting forth the 
name of the original veteran-obligor and the file number assigned to 
the case by the Secretary, if available, or otherwise the name and 
serial number of the veteran. If mailed, the notice shall be by 
certified mail when so provided by Sec. Sec.  36.4800 to 36.4880.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4836  [Reserved]


Sec.  36.4837  Conformance of loan instruments.

    Regulations issued under 38 U.S.C. chapter 37 and in effect on the 
date of any loan which is submitted and accepted or approved for a 
guaranty or for insurance thereunder, shall govern the rights, duties, 
and liabilities of the parties to such loan and any provisions of the 
loan instruments inconsistent with such regulations are hereby amended 
and supplemented to conform thereto.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4838  Supplementary administrative action.

    (a) Notwithstanding any requirement, condition, or limitation 
stated in or imposed by the regulations concerning the guaranty or 
insurance of loans to veterans, the Under Secretary for Benefits, or 
the Director, Loan Guaranty Service, within the limitations and 
conditions prescribed by the Secretary,

[[Page 6335]]

is hereby authorized, if he or she finds the interests of the 
Government are not adversely affected, to relieve undue prejudice to a 
debtor, holder, or other person, which might otherwise result, provided 
no such action may be taken which would impair the vested rights of any 
person affected thereby. If such requirement, condition, or limitation 
is of an administrative or procedural (not substantive) nature, any 
employee designated in Sec.  36.4845 is hereby authorized to grant 
similar relief if he or she finds the failure or error of the lender 
was due to misunderstanding or mistake and that the interests of the 
Government are not adversely affected. Provisions of the regulations 
considered to be of an administrative or procedural (nonsubstantive) 
nature are limited to the following:
    (1) The requirement in Sec.  36.4808(a) that a lender obtain in 
prior approval of the Secretary before closing a joint loan if the 
lender or class of lenders is eligible or has been approved by the 
Secretary to close loans on the automatic basis pursuant to 38 U.S.C. 
3702(d);
    (2) The requirements in Sec.  36.4803(l) concerning the giving of 
notice in assumption cases under 38 U.S.C. 3714;
    (3) The requirement in Sec.  36.4824(d)(3) that no claim is payable 
unless it is submitted within 1 year after the liquidation sale;
    (4) The requirement in Sec.  36.4823(a) to submit notice of 
election to convey a property to VA within 15 days of the date of 
liquidation sale;
    (5) The determination by the holder in Sec.  36.4823(b) of the 
amount of indebtedness that must be waived in order to make a property 
eligible for conveyance;
    (6) The determination in Sec.  36.4814(f)(2) of the date beyond 
which no additional fees or charges will be allowed;
    (7) The determination in Sec.  36.4824(a)(3) of the interest 
payable on a claim under guaranty; and
    (8) The reconsideration in Sec.  36.4824(e) of the holder's 
electronic request for review of any denied items within the claim;
    (b) Authority is hereby granted to the Loan Guaranty Officer to 
redelegate authority to make any determinations under this section.

(Authority: 38 U.S.C. 3714 and 3720)


Sec.  36.4839  Eligibility of loans; reasonable value requirements.

    (a) Evidence of guaranty or insurance shall be issued in respect to 
a loan for any of the purposes specified in 38 U.S.C. 3710(a) only if 
all of the following conditions are met:
    (1) The proceeds of such loan have been used to pay for the 
property purchased, constructed, repaired, refinanced, altered, or 
improved.
    (2) Except as to refinancing loans pursuant to 38 U.S.C. 
3710(a)(8), (a)(9)(B)(i), (a)(11), or (b)(7) and energy efficient 
mortgages pursuant to 38 U.S.C. 3710(d), the loan (including any 
scheduled deferred interest added to principal) does not exceed the 
reasonable value of the property or projected reasonable value of a new 
home which is security for a graduated payment mortgage loan, as 
appropriate, as determined by the Secretary. For the purpose of 
determining the reasonable value of a graduated payment mortgage loan 
to purchase a new home, the reasonable value of the property as of the 
time the loan is made shall be calculated to increase at a rate not in 
excess of 2.5 percent per year, but in no event may the projected value 
of the property exceed 115 percent of the initially established 
reasonable value.

(Authority: 38 U.S.C. 3703(d)(2))

    (3) The veteran has certified, in such form as the Secretary may 
prescribe, that the veteran has paid in cash from his or her own 
resources on account of such purchase, construction, alteration, 
repair, or improvement a sum equal to the difference, if any, between 
the purchase price or cost of the property and its reasonable value.
    (b) A loan guaranteed under 38 U.S.C. 3710(d) which includes the 
cost of energy efficient improvements may exceed the reasonable value 
of the property. The cost of the energy efficient improvements that may 
be financed may not exceed $3,000; provided, however, that up to $6,000 
in energy efficient improvements may be financed if the increase in the 
monthly payment for principal and interest does not exceed the likely 
reduction in monthly utility costs resulting from the energy efficient 
improvements.

(Authority: 38 U.S.C. 3710)

    (c) Notwithstanding that the aggregate of the loan amount in the 
case of loans for the purposes specified in paragraph (a) of this 
section, and the amount remaining unpaid on taxes, special assessments, 
prior mortgage indebtedness, or other obligations of any character 
secured by enforceable superior liens or a right to such lien existing 
as of the date the loan is closed exceeds the reasonable value of such 
property as of said date and that evidence of guaranty or insurance 
credit is issued in respect thereof, as between the holder and 
Secretary (for the purpose of computing the claim on the guaranty or 
insurance and for the purposes of Sec.  36.4823, and all accounting), 
the indebtedness which is the subject of the guaranty or insurance 
shall be deemed to have been reduced as of the date of the loan by a 
sum equal to such excess, less any amounts secured by liens released or 
paid on the obligations secured by such superior liens or rights by a 
holder or others without expense to or obligation on the debtor 
resulting from such payment, or release of lien or right; and all 
payments made on the loan shall be applied to the indebtedness as so 
reduced. Nothing in this paragraph affects any right or liability 
resulting from fraud or willful misrepresentation.

(Authority: 38 U.S.C. 3703(c)(1), 3710, 3712)


Sec.  36.4840  Underwriting standards, processing procedures, lender 
responsibility, and lender certification.

    (a) Use of standards. The standards contained in paragraphs (c) 
through (j) of this section will be used to determine whether the 
veteran's present and anticipated income and expenses, and credit 
history are satisfactory. These standards do not apply to loans 
guaranteed pursuant to 38 U.S.C. 3710(a)(8) except for cases where the 
Secretary is required to approve the loan in advance under Sec.  
36.4807.

(Authority: 38 U.S.C. 3703, 3710)

    (b) Waiver of standards. Use of the standards in paragraphs (c) 
through (j) of this section for underwriting home loans will be waived 
only in extraordinary circumstances when the Secretary determines, 
considering the totality of circumstances, that the veteran is a 
satisfactory credit risk.
    (c) Methods. The two primary underwriting standards that will be 
used in determining the adequacy of the veteran's present and 
anticipated income are debt-to-income ratio and residual income 
analysis. They are described in paragraphs (d) through (f) of this 
section. Ordinarily, to qualify for a loan, the veteran must meet both 
standards. Failure to meet one standard, however, will not 
automatically disqualify a veteran. The following exceptions shall 
apply to cases where a veteran does not meet both standards:
    (1) If the debt-to-income ratio is 41 percent or less, and the 
veteran does not meet the residual income standard, the loan may be 
approved with justification, by the underwriter's supervisor, as set 
out in paragraph (c)(4) of this section.
    (2) If the debt-to-income ratio is greater than 41 percent (unless 
it is larger due solely to the existence of tax-free income which 
should be noted in the loan file), the loan may be approved

[[Page 6336]]

with justification, by the underwriter's supervisor, as set out in 
paragraph (c)(4) of this section.
    (3) If the ratio is greater than 41 percent and the residual income 
exceeds the guidelines by at least 20 percent, the second level review 
and statement of justification are not required.
    (4) In any case described by paragraphs (c)(1) and (c)(2) of this 
section, the lender must fully justify the decision to approve the loan 
or submit the loan to the Secretary for prior approval in writing. The 
lender's statement must not be perfunctory, but should address the 
specific compensating factors, as set forth in paragraph (c)(5) of this 
section, justifying the approval of the loan. The statement must be 
signed by the underwriter's supervisor. It must be stressed that the 
statute requires not only consideration of a veteran's present and 
anticipated income and expenses, but also that the veteran be a 
satisfactory credit risk. Therefore, meeting both the debt-to-income 
ratio and residual income standards does not mean that the loan is 
automatically approved. It is the lender's responsibility to base the 
loan approval or disapproval on all the factors present for any 
individual veteran. The veteran's credit must be evaluated based on the 
criteria set forth in paragraph (g) of this section as well as a 
variety of compensating factors that should be evaluated.
    (5) The following are examples of acceptable compensating factors 
to be considered in the course of underwriting a loan:
    (i) Excellent long-term credit;
    (ii) Conservative use of consumer credit;
    (iii) Minimal consumer debt;
    (iv) Long-term employment;
    (v) Significant liquid assets;
    (vi) Down payment or the existence of equity in refinancing loans;
    (vii) Little or no increase in shelter expense;
    (viii) Military benefits;
    (ix) Satisfactory homeownership experience;
    (x) High residual income;
    (xi) Low debt-to-income ratio;
    (xii) Tax credits of a continuing nature, such as tax credits for 
child care; and
    (xiii) Tax benefits of home ownership.
    (6) The list in paragraph (c)(5) of this section is not exhaustive 
and the items are not in any priority order. Valid compensating factors 
should represent unusual strengths rather than mere satisfaction of 
basic program requirements. Compensating factors must be relevant to 
the marginality or weakness.
    (d) Debt-to-income ratio. A debt-to-income ratio that compares the 
veteran's anticipated monthly housing expense and total monthly 
obligations to his or her stable monthly income will be computed to 
assist in the assessment of the potential risk of the loan. The ratio 
will be determined by taking the sum of the monthly Principal, 
Interest, Taxes and Insurance (PITI) of the loan being applied for, 
homeowners and other assessments such as special assessments, 
condominium fees, homeowners association fees, etc., and any long-term 
obligations divided by the total of gross salary or earnings and other 
compensation or income. The ratio should be rounded to the nearest two 
digits; e.g., 35.6 percent would be rounded to 36 percent. The standard 
is 41 percent or less. If the ratio is greater than 41 percent, the 
steps cited in paragraphs (c)(1) through (c)(6) of this section apply.
    (e) Residual income guidelines. The guidelines provided in this 
paragraph for residual income will be used to determine whether the 
veteran's monthly residual income will be adequate to meet living 
expenses after estimated monthly shelter expenses have been paid and 
other monthly obligations have been met. All members of the household 
must be included in determining if the residual income is sufficient. 
They must be counted even if the veteran's spouse is not joining in 
title or on the note, or if there are any other individuals depending 
on the veteran for support, such as children from a spouse's prior 
marriage who are not the veteran's legal dependents. It is appropriate, 
however, to reduce the number of members of a household to be counted 
for residual income purposes if there is sufficient verified income not 
otherwise included in the loan analysis, such as child support being 
regularly received as discussed in paragraph (e)(4) of this section. In 
the case of a spouse not to be obligated on the note, verification that 
he/she has stable and reliable employment as discussed in paragraph 
(f)(3) of this section would allow not counting the spouse in 
determining the sufficiency of the residual income. The guidelines for 
residual income are based on data supplied in the Consumer Expenditure 
Survey (CES) published by the Department of Labor's Bureau of Labor 
Statistics. Regional minimum incomes have been developed for loan 
amounts up to $79,999 and for loan amounts of $80,000 and above. It is 
recognized that the purchase price of the property may affect family 
expenditure levels in individual cases. This factor may be given 
consideration in the final determination in individual loan analyses. 
For example, a family purchasing in a higher-priced neighborhood may 
feel a need to incur higher-than-average expenses to support a 
lifestyle comparable to that in their environment, whereas a 
substantially lower-priced home purchase may not compel such 
expenditures. It should also be clearly understood from this 
information that no single factor is a final determinant in any 
applicant's qualification for a VA-guaranteed loan. Once the residual 
income has been established, other important factors must be examined. 
One such consideration is the amount being paid currently for rental or 
housing expenses. If the proposed shelter expense is materially in 
excess of what is currently being paid, the case may require closer 
scrutiny. In such cases, consideration should be given to the ability 
of the borrower and spouse to accumulate liquid assets, such as cash 
and bonds, and to the amount of debts incurred while paying a lesser 
amount for shelter. For example, if an application indicates little or 
no capital reserves and excessive obligations, it may not be reasonable 
to conclude that a substantial increase in shelter expenses can be 
absorbed. Another factor of prime importance is the applicant's manner 
of meeting obligations. A poor credit history alone is a basis for 
disapproving a loan, as is an obviously inadequate income. When one or 
the other is marginal, however, the remaining aspect must be closely 
examined to assure that the loan applied for will not exceed the 
applicant's ability or capacity to repay. Therefore, it is important to 
remember that the figures provided below for residual income are to be 
used as a guide and should be used in conjunction with the steps 
outlined in paragraphs (c) through (j) of this section. The residual 
income guidelines are as follows:
    (1) Table of residual incomes by region (for loan amounts of 
$79,999 and below):

[[Page 6337]]



                                       Table of Residual Incomes by Region
                                     [For loan amounts of $79,999 and below]
----------------------------------------------------------------------------------------------------------------
                       Family size \1\                         Northeast     Midwest       South         West
----------------------------------------------------------------------------------------------------------------
1...........................................................          390          382          382          425
2...........................................................          654          641          641          713
3...........................................................          788          772          772          859
4...........................................................          888          868          868          967
5...........................................................          921          902          902        1,004
----------------------------------------------------------------------------------------------------------------
\1\ For families with more than five members, add $75 for each additional member up to a family of seven.
  ``Family'' includes all members of the household.

    (2) Table of residual incomes by region (for loan amounts of 
$80,000 and above):

                                       Table of Residual Incomes by Region
                                     [For loan amounts of $80,000 and above]
----------------------------------------------------------------------------------------------------------------
                       Family size \1\                         Northeast     Midwest       South         West
----------------------------------------------------------------------------------------------------------------
1...........................................................          450          441          441          491
2...........................................................          755          738          738          823
3...........................................................          909          889          889          990
4...........................................................        1,025        1,003        1,003        1,117
5...........................................................        1,062        1,039        1,039        1,158
----------------------------------------------------------------------------------------------------------------
\1\ For families with more than five members, add $80 for each additional member up to a family of seven.
  ``Family'' includes all members of the household.

    (3) Geographic regions for residual income guidelines: Northeast--
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, 
Pennsylvania, Rhode Island and Vermont; Midwest--Illinois, Indiana, 
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, 
Ohio, South Dakota and Wisconsin; South--Alabama, Arkansas, Delaware, 
District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, 
Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, 
Tennessee, Texas, Virginia, West Virginia; West--Alaska, Arizona, 
California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, 
Oregon, Utah, Washington and Wyoming.
    (4) Military adjustments. For loan applications involving an 
active-duty servicemember or military retiree, the residual income 
figures will be reduced by a minimum of 5 percent if there is a clear 
indication that the borrower or spouse will continue to receive the 
benefits resulting from the use of facilities on a nearby military 
base. (This reduction applies to tables in paragraph (e) of this 
section.)
    (f) Stability and reliability of income. Only stable and reliable 
income of the veteran and spouse can be considered in determining 
ability to meet mortgage payments. Income can be considered stable and 
reliable if it can be concluded that it will continue during the 
foreseeable future.
    (1) Verification. Income of the borrower and spouse which is 
derived from employment and which is considered in determining the 
family's ability to meet the mortgage payments, payments on debts and 
other obligations, and other expenses must be verified. If the spouse 
is employed and will be contractually obligated on the loan, the 
combined income of both the veteran and spouse is considered when the 
income of the veteran alone is not sufficient to qualify for the amount 
of the loan sought. In other than community property states, if the 
spouse will not be contractually obligated on the loan, Regulation B 
(12 CFR part 202), promulgated by the Federal Reserve Board pursuant to 
the Equal Credit Opportunity Act, prohibits any request for, or 
consideration of, information concerning the spouse (including income, 
employment, assets, or liabilities), except that if the applicant is 
relying on alimony, child support, or maintenance payments from a 
spouse or former spouse as a basis for repayment of the loan, 
information concerning such spouse or former spouse may be requested 
and considered (see paragraph (f)(4) of this section). In community 
property states, information concerning a spouse may be requested and 
considered in the same manner as that for the applicant. The standards 
applied to income of the veteran are also applicable to that of the 
spouse. There can be no discounting of income on account of sex, 
marital status, or any other basis prohibited by the Equal Credit 
Opportunity Act. Income claimed by an applicant that is not or cannot 
be verified cannot be considered when analyzing the loan. If the 
veteran or spouse has been employed by a present employer for less than 
2 years, a 2-year history covering prior employment, schooling, or 
other training must be secured. Any periods of unemployment must be 
explained. Employment verifications and pay stubs must be no more than 
120 days (180 days for new construction) old to be considered valid. 
For loans closed automatically, this requirement will be considered 
satisfied if the date of the employment verification is within 120 days 
(180 days for new construction) of the date the note is signed. For 
prior approval loans, this requirement will be considered satisfied if 
the verification of employment is dated within 120 days of the date the 
application is received by VA.
    (2) Active-duty, Reserve, or National Guard applicants. (i) In the 
case of an active-duty applicant, a military Leave & Earnings Statement 
is required and will be used instead of an employment verification. The 
statement must be no more than 120 days old (180 days for new 
construction) and must be the

[[Page 6338]]

original or a lender-certified copy of the original. For loans closed 
automatically, this requirement is satisfied if the date of the Leave & 
Earnings Statement is within 120 days (180 days for new construction) 
of the date the note is signed. For prior approval loans, this 
requirement will be considered satisfied if the verification of 
employment is dated within 120 days of the date the application is 
received by VA.
    (ii) For servicemembers within 12 months of release from active 
duty, or members of the Reserves or National Guard within 12 months of 
release, one of the following is also required:
    (A) Documentation that the servicemember has in fact already 
reenlisted or extended his/her period of active duty or Reserve or 
National Guard service to a date beyond the 12-month period following 
the projected closing of the loan.
    (B) Verification of a valid offer of local civilian employment 
following release from active duty. All data pertinent to sound 
underwriting procedures (date employment will begin, earnings, etc.) 
must be included.
    (C) A statement from the servicemember that he/she intends to 
reenlist or extend his/her period of active duty or Reserve or National 
Guard service to a date beyond the 12 month period following the 
projected loan closing date, and a statement from the servicemember's 
commanding officer confirming that the servicemember is eligible to 
reenlist or extend his/her active duty or Reserve or National Guard 
service as indicated and that the commanding officer has no reason to 
believe that such reenlistment or extension will not be granted.
    (D) Other unusually strong positive underwriting factors, such as a 
down payment of at least 10 percent, significant cash reserves, or 
clear evidence of strong ties to the community coupled with a 
nonmilitary spouse's income so high that only minimal income from the 
active duty servicemember or member of the Reserves or National Guard 
is needed to qualify.
    (iii) Each active-duty member who applies for a loan must be 
counseled through the use of VA Form 26-0592, Counseling Checklist for 
Military Homebuyers. Lenders must submit a signed and dated VA Form 26-
0592 with each prior approval loan application or automatic loan report 
involving a borrower on active duty.
    (3) Income reliability. Income received by the borrower and spouse 
is to be used only if it can be concluded that the income will continue 
during the foreseeable future and, thus, should be properly considered 
in determining ability to meet the mortgage payments. If an employer 
puts N/A or otherwise declines to complete a verification of employment 
statement regarding the probability of continued employment, no further 
action is required of the lender. Reliability will be determined based 
on the duration of the borrower's current employment together with his 
or her overall documented employment history. There can be no 
discounting of income solely because it is derived from an annuity, 
pension or other retirement benefit, or from part-time employment. 
However, unless income from overtime work and part-time or second jobs 
can be accorded a reasonable likelihood that it is continuous and will 
continue in the foreseeable future, such income should not be used. 
Generally, the reliability of such income cannot be demonstrated unless 
the income has continued for 2 years. The hours of duty and other work 
conditions of the applicant's primary job, and the period of time in 
which the applicant was employed under such arrangement, must be such 
as to permit a clear conclusion as to a good probability that overtime 
or part-time or secondary employment can and will continue. Income from 
overtime work and part-time jobs not eligible for inclusion as primary 
income may, if properly verified for at least 12 months, be used to 
offset the payments due on debts and obligations of an intermediate 
term, i.e., 6 to 24 months. Such income must be described in the loan 
file. The amount of any pension or compensation and other income, such 
as dividends from stocks, interest from bonds, savings accounts, or 
other deposits, rents, royalties, etc., will be used as primary income 
if it is reasonable to conclude that such income will continue in the 
foreseeable future. Otherwise, it may be used only to offset 
intermediate-term debts, as described in this paragraph. Also, the 
likely duration of certain military allowances cannot be determined 
and, therefore, will be used only to offset intermediate-term debts, as 
described in this paragraph. Such allowances are: Pro-pay, flight or 
hazard pay, and overseas or combat pay, all of which are subject to 
periodic review and/or testing of the recipient to ascertain whether 
eligibility for such pay will continue. Only if it can be shown that 
such pay has continued for a prolonged period and can be expected to 
continue because of the nature of the recipient's assigned duties, will 
such income be considered as primary income. For instance, flight pay 
verified for a pilot can be regarded as probably continuous and, thus, 
should be added to the base pay. Income derived from service in the 
Reserves or National Guard may be used if the applicant has served in 
such capacity for a period of time sufficient to evidence good 
probability that such income will continue beyond 12 months. The total 
period of active and reserve service may be helpful in this regard. 
Otherwise, such income may be used to offset intermediate-term debts. 
There are a number of additional income sources whose contingent nature 
precludes their being considered as available for repayment of a long-
term mortgage obligation. Temporary income items such as VA educational 
allowances and unemployment compensation do not represent stable and 
reliable income and will not be taken into consideration in determining 
the ability of the veteran to meet the income requirement of the 
governing law. As required by the Equal Opportunity Act Amendments of 
1976, Public Law 94-239, income from public assistance programs is used 
to qualify for a loan if it can be determined that the income will 
probably continue for 3 years or more.
    (4) Tax-exempt income. Special consideration can be given to 
verified nontaxable income once it has been established that such 
income is likely to continue (and remain untaxed) into the foreseeable 
future. Such income includes certain military allowances, child support 
payments, workers' compensation benefits, disability retirement 
payments and certain types of public assistance payments. In such 
cases, current income tax tables may be used to determine an amount 
which can be prudently employed to adjust the borrower's actual income. 
This adjusted or ``grossed up'' income may be used to calculate the 
monthly debt-to-income ratio, provided the analysis is documented. Only 
the borrower's actual income may be used to calculate the residual 
income. Care should be exercised to ensure that the income is in fact 
tax-exempt.
    (5) Alimony, child support, maintenance, workers' compensation, 
foster care payments. (i) If an applicant chooses to reveal income from 
alimony, child support or maintenance payments (after first having been 
informed that any such disclosure is voluntary pursuant to the Federal 
Reserve Board's Regulation B (12 CFR part 202)), such payments are 
considered as income to the extent that the payments are likely to be 
consistently made. Factors to be considered in determining the 
likelihood of consistent payments include, but are not limited to: 
Whether the payments are received pursuant to a written agreement or 
court decree; the

[[Page 6339]]

length of time the payments have been received; the regularity of 
receipt; the availability of procedures to compel payment; and the 
creditworthiness of the payor, including the credit history of the 
payor when available under the Fair Credit Reporting Act or other 
applicable laws. However, the Fair Credit Reporting Act (15 U.S.C. 
1681(b)) limits the permissible purposes for which credit reports may 
be ordered, in the absence of written instructions of the consumer to 
whom the report relates, to business transactions involving the subject 
of the credit report or extensions of credit to the subject of the 
credit report.
    (ii) If the applicant chooses to reveal income related to workers' 
compensation, it will be considered as income to the extent it can be 
determined such income will continue.
    (iii) Income received specifically for the care of any foster 
child(ren) may be counted as income if documented. Generally, however, 
such foster care income is to be used only to balance the expenses of 
caring for the foster child(ren) against any increased residual income 
requirements.
    (6) Military quarters allowance. With respect to off-base housing 
(quarters) allowances for service personnel on active duty, it is the 
policy of the Department of Defense to utilize available on-base 
housing when possible. In order for a quarters allowance to be 
considered as continuing income, it is necessary that the applicant 
furnish written authorization from his or her commanding officer for 
off-base housing. This authorization should verify that quarters will 
not be made available and that the individual should make permanent 
arrangements for nonmilitary housing. A Department of Defense form, DD 
Form 1747, Status of Housing Availability, is used by the Family 
Housing Office to advise personnel regarding family housing. The 
applicant's quarters allowance cannot be considered unless item b 
(Permanent) or d is completed on DD Form 1747, dated October 1990. Of 
course, if the applicant's income less quarters allowance is 
sufficient, there is no need for assurance that the applicant has 
permission to occupy nonmilitary housing provided that a determination 
can be made that the occupancy requirements of the law will be met. 
Also, authorization to obtain off-base housing will not be required 
when certain duty assignments would clearly qualify service personnel 
with families for quarters allowance. For instance, off-base housing 
authorizations need not be obtained for service personnel stationed 
overseas who are not accompanied by their families, recruiters on 
detached duty, or military personnel stationed in areas where no on-
base housing exists. In any case in which no off-base housing 
authorization is obtained, an explanation of the circumstances 
justifying its omission must be included with the loan application 
except when it has been established by the VA facility of jurisdiction 
that the waiting lists for on-base housing are so long that it is 
improbable that individuals desiring to purchase off-base housing would 
be precluded from doing so in the foreseeable future. If stations make 
such a determination, a release shall be issued to inform lenders.
    (7) Automobile (or similar) allowance. Generally, automobile 
allowances are paid to cover specific expenses related to an 
applicant's employment, and it is appropriate to use such income to 
offset a corresponding car payment. However, in some instances, such an 
allowance may exceed the car payment. With proper documentation, income 
from a car allowance which exceeds the car payment can be counted as 
effective income. Likewise, any other similar type of allowance which 
exceeds the specific expense involved may be added to gross income to 
the extent it is documented to exceed the actual expense.
    (8) Commissions. When all or a major portion of the veteran's 
income is derived from commissions, it will be necessary to establish 
the stability of such income if it is to be considered in the loan 
analysis for the repayment of the mortgage debt and/or short-term 
obligations. In order to assess the value of such income, lenders 
should obtain written verification of the actual amount of commissions 
paid to date, the basis for the payment of such commissions and when 
commissions are paid; i.e., monthly, quarterly, semiannually, or 
annually. Lenders should also obtain signed and dated individual income 
tax returns, plus applicable schedules, for the previous 2 years, or 
for whatever additional period is deemed necessary to properly 
demonstrate a satisfactory earnings record. The length of the veteran's 
employment in the type of occupation for which commissions are paid is 
also an important factor in the assessment of the stability of the 
income. If the veteran has been employed for a relatively short time, 
the income should not normally be considered stable unless the product 
or service was the same or closely related to the product or service 
sold in an immediate prior position. Generally, income from commissions 
is considered stable when the applicant has been receiving such income 
for at least 2 years. Less than 2 years of income from commissions 
cannot usually be considered stable. When an applicant has received 
income from commissions for less than 1 year, it will rarely be 
possible to demonstrate that the income is stable for qualifying 
purposes; such cases would require in-depth development.
    (9) Self-employment. Generally, income from self-employment is 
considered stable when the applicant has been in business for at least 
2 years. Less than 2 years of income from self-employment cannot 
usually be considered stable unless the applicant has had previous 
related employment and/or extensive specialized training. When an 
applicant has been self-employed less than 1 year, it will rarely be 
possible to demonstrate that the income is stable for qualifying 
purposes; such cases would require in-depth development. The following 
documentation is required for all self-employed borrowers:
    (i) A profit-and-loss statement for the prior fiscal year (12-month 
accounting cycle), plus the period year to date since the end of the 
last fiscal year (or for whatever shorter period records may be 
available), and balance sheet based on the financial records. The 
financial statement must be sufficient for a loan underwriter to 
determine the necessary information for loan approval and an 
independent audit (on the veteran and/or the business) by a Certified 
Public Accountant will be required if necessary for such determination; 
and
    (ii) Copies of signed individual income tax returns, plus all 
applicable schedules for the previous 2 years, or for whatever 
additional period is deemed necessary to properly demonstrate a 
satisfactory earnings record, must be obtained. If the business is a 
corporation or partnership, copies of signed Federal business income 
tax returns for the previous two years plus all applicable schedules 
for the corporation or partnership must be obtained; and
    (iii) If the business is a corporation or partnership, a list of 
all stockholders or partners showing the interest each holds in the 
business will be required. Some cases may justify a written credit 
report on the business as well as the applicant. When the business is 
of an unusual type and it is difficult to determine the probability of 
its continued operation, explanation as to the function and purpose of 
the business may be needed from the applicant and/or any other 
qualified party with the acknowledged expertise to express a valid 
opinion.
    (10) Recently discharged veterans. Loan applications received from

[[Page 6340]]

recently discharged veterans who have little or no employment 
experience other than their military occupation and from veterans 
seeking VA-guaranteed loans who have retired after 20 years of active 
military duty require special attention. The retirement income of the 
latter veterans in many cases may not be sufficient to meet the 
statutory income requirements for the loan amount sought. Many have 
obtained full-time employment and have been employed in their new jobs 
for a very short time.
    (i) It is essential in determining whether veterans in these 
categories qualify from the income standpoint for the amount of the 
loan sought, that the facts in respect to their present employment and 
retirement income be fully developed, and that each case be considered 
on its individual merits.
    (ii) In most cases the veteran's current income or current income 
plus his or her retirement income is sufficient. The problem lies in 
determining whether it can be properly concluded that such income level 
will continue for the foreseeable future. If the veteran's employment 
status is that of a trainee or an apprentice, this will, of course, be 
a factor. In cases of the self-employed, the question to be resolved is 
whether there are reasonable prospects that the business enterprise 
will be successful and produce the required income. Unless a favorable 
conclusion can be made, the income from such source should not be 
considered in the loan analysis.
    (iii) If a recently discharged veteran has no prior employment 
history and the veteran's verification of employment shows he or she 
has not been on the job a sufficient time in which to become 
established, consideration should be given to the duties the veteran 
performed in the military service. When it can be determined that the 
duties a veteran performed in the service are similar or are in direct 
relation to the duties of the applicant's present position, such duties 
may be construed as adding weight to his or her present employment 
experience and the income from the veteran's present employment thus 
may be considered available for qualifying the loan, notwithstanding 
the fact that the applicant has been on the present job only a short 
time. This same principle may be applied to veterans recently retired 
from the service. In addition, when the veteran's income from 
retirement, in relation to the total of the estimated shelter expense, 
long-term debts and amount available for family support, is such that 
only minimal income from employment is necessary to qualify from the 
income standpoint, it would be proper to resolve the doubt in favor of 
the veteran. It would be erroneous, however, to give consideration to a 
veteran's income from employment for a short duration in a job 
requiring skills for which the applicant has had no training or 
experience.
    (iv) To illustrate the provisions of paragraph (f)(10), it would be 
proper to use short-term employment income in qualifying a veteran who 
had experience as an airplane mechanic in the military service and the 
individual's employment after discharge or retirement from the service 
is in the same or allied fields; e.g., auto mechanic or machinist. This 
presumes, however, that the verification of employment included a 
statement that the veteran was performing the duties of the job 
satisfactorily, the possibility of continued employment was favorable 
and that the loan application is eligible in all other respects. An 
example of nonqualifying experience is that of a veteran who was an Air 
Force pilot and has been employed in insurance sales on commission for 
a short time. Most cases, of course, fall somewhere between those 
extremes. It is for this reason that the facts of each case must be 
fully developed prior to closing the loan automatically or submitting 
the case to VA for prior approval.
    (11) Employment of short duration. The provisions of paragraph 
(f)(7) of this section are similarly applicable to applicants whose 
employment is of short duration. Such cases will entail careful 
consideration of the employer's confirmation of employment, probability 
of permanency, past employment record, the applicant's qualifications 
for the position, and previous training, including that received in the 
military service. In the event that such considerations do not enable a 
determination that the income from the veteran's current position has a 
reasonable likelihood of continuance, such income should not be 
considered in the analysis. Applications received from persons employed 
in the building trades, or in other occupations affected by climatic 
conditions, should be supported by documentation evidencing the 
applicant's total earnings to date and covering a period of not less 
than 1 year as well as signed and dated copies of complete income tax 
returns, including all schedules for the past 2 years or for whatever 
additional period is deemed necessary to properly demonstrate a 
satisfactory earnings record. If the applicant works out of a union, 
evidence of the previous year's earnings should be obtained together 
with a verification of employment from the current employer.
    (12) Rental income--(i) Multi-unit subject property. When the loan 
pertains to a structure with more than a one-family dwelling unit, the 
prospective rental income will not be considered unless the veteran can 
demonstrate a reasonable likelihood of success as a landlord, and 
sufficient cash reserves are verified to enable the veteran to carry 
the mortgage loan payments (principal, interest, taxes, and insurance) 
without assistance from the rental income for a period of at least 6 
months. The determination of the veteran's likelihood of success as a 
landlord will be based on documentation of any prior experience in 
managing rental units or other collection activities. The amount of 
rental income to be used in the loan analysis will be based on 75 
percent of the amount indicated on the lease or rental agreement, 
unless a greater percentage can be documented.
    (ii) Rental of existing home. Proposed rental of a veteran's 
existing property may be used to offset the mortgage payment on that 
property, provided there is no indication that the property will be 
difficult to rent. If available, a copy of the rental agreement should 
be obtained. It is the responsibility of the loan underwriter to be 
aware of the condition of the local rental market. For instance, in 
areas where the rental market is very strong the absence of a lease 
should not automatically prohibit the offset of the mortgage by the 
proposed rental income.
    (iii) Other rental property. If income from rental property will be 
used to qualify for the new loan, the documentation required of a self-
employed applicant should be obtained together with evidence of cash 
reserves equaling 3 months PITI on the rental property. As for any 
self-employed earnings (see paragraph (f)(7) of this section), 
depreciation claimed may be added back in as income. In the case of a 
veteran who has no experience as a landlord, it is unlikely that the 
income from a rental property may be used to qualify for the new loan.
    (13) Taxes and other deductions. Deductions to be applied for 
Federal income taxes and Social Security may be obtained from the 
Employer's Tax Guide (Circular E) issued by the Internal Revenue 
Service (IRS). (For veterans receiving a mortgage credit certificate 
(MCC), see paragraph (f)(14) of this section.) Any State or local taxes 
should be estimated or obtained from charts similar to those provided 
by IRS which may be available in those states with withholding taxes. A 
determination of the amount paid or withheld for retirement purposes 
should be made

[[Page 6341]]

and used when calculating deductions from gross income. In determining 
whether a veteran-applicant meets the income criteria for a loan, some 
consideration may be given to the potential tax benefits the veteran 
will realize if the loan is approved. This can be done by using the 
instructions and worksheet portion of IRS Form W-4, Employee's 
Withholding Allowance Certificate, to compute the total number of 
permissible withholding allowances. That number can then be used when 
referring to IRS Circular E and any appropriate similar State 
withholding charts to arrive at the amount of Federal and State income 
tax to be deducted from gross income.
    (14) Mortgage credit certificates. (i) The Internal Revenue Code 
(26 U.S.C.) as amended by the Tax Reform Act of 1984, allows states and 
other political subdivisions to trade in all or part of their authority 
to issue mortgage revenue bonds for authority to issue MCCs. Veterans 
who are recipients of MCCs may realize a significant reduction in their 
income tax liability by receiving a Federal tax credit for a percentage 
of their mortgage interest payment on debt incurred on or after January 
1, 1985.
    (ii) Lenders must provide a copy of the MCC to VA with the home 
loan application. The MCC will specify the rate of credit allowed and 
the amount of certified indebtedness; i.e., the indebtedness incurred 
by the veteran to acquire a principal residence or as a qualified home 
improvement or rehabilitation loan.
    (iii) For credit underwriting purposes, the amount of tax credit 
allowed to a veteran under an MCC will be treated as a reduction in the 
monthly Federal income tax. For example, a veteran having a $600 
monthly interest payment and an MCC providing a 30-percent tax credit 
would receive a $180 (30 percent x $600) tax credit each month. 
However, because the annual tax credit, which amounts to $2,160 (12 x 
$180), exceeds $2,000 and is based on a 30-percent credit rate, the 
maximum tax credit the veteran can receive is limited to $2,000 per 
year (Pub. L. 98-369) or $167 per month ($2,000/12). As a consequence 
of the tax credit, the interest on which a deduction can be taken will 
be reduced by the amount of the tax credit to $433 ($600-$167). This 
reduction should also be reflected when calculating Federal income tax.
    (iv) For underwriting purposes, the amount of the tax credit is 
limited to the amount of the veteran's maximum tax liability. If, in 
the example in paragraph (f)(14)(iii) of this section, the veteran's 
tax liability for the year were only $1,500, the monthly tax credit 
would be limited to $125 ($1,500/12).
    (g) Credit. The conclusion reached as to whether or not the veteran 
and spouse are satisfactory credit risks must also be based on a 
careful analysis of the available credit data. Regulation B (12 CFR 
part 202), promulgated by the Federal Reserve Board pursuant to the 
Equal Credit Opportunity Act, requires that lenders, in evaluating 
creditworthiness, shall consider, on the applicant's request, the 
credit history, when available, of any account reported in the name of 
the applicant's spouse or former spouse which the applicant can 
demonstrate accurately reflects the applicant's creditworthiness. In 
other than community property states, if the spouse will not be 
contractually obligated on the loan, Regulation B prohibits any request 
for or consideration of information about the spouse concerning income, 
employment, assets or liabilities. In community property states, 
information concerning a spouse may be requested and considered in the 
same manner as that for the applicant.
    (1) Adverse data. If the analysis develops any derogatory credit 
information and, despite such facts, it is determined that the veteran 
and spouse are satisfactory credit risks, the basis for the decision 
must be explained. If a veteran and spouse have debts outstanding which 
have not been paid timely, or which they have refused to pay, the fact 
that the outstanding debts are paid after the acceptability of the 
credit is questioned or in anticipation of applying for new credit does 
not, of course, alter the fact that the record for paying debts has 
been unsatisfactory. With respect to unpaid debts, lenders may take 
into consideration a veteran's claim of bona fide or legal defenses. 
Such defenses are not applicable when the debt has been reduced to 
judgment. Where a collection account has been established, if it is 
determined that the borrower is a satisfactory credit risk, it is not 
mandatory that such an account be paid off in order for a loan to be 
approved. Court-ordered judgments, however, must be paid off before a 
new loan is approved.
    (2) Bankruptcy. When the credit information shows that the borrower 
or spouse has been discharged in bankruptcy under the ``straight'' 
liquidation and discharge provisions of the bankruptcy law, this would 
not in itself disqualify the loan. However, in such cases it is 
necessary to develop complete information as to the facts and 
circumstances concerning the bankruptcy. Generally speaking, when the 
borrower or spouse, as the case may be, has been regularly employed 
(not self-employed) and has been discharged in bankruptcy within the 
last one to two years, it probably would not be possible to determine 
that the borrower or spouse is a satisfactory credit risk unless both 
of the following requirements are satisfied:
    (i) The borrower or spouse has obtained credit subsequent to the 
bankruptcy and has met the credit payments in a satisfactory manner 
over a continued period; and
    (ii) The bankruptcy was caused by circumstances beyond the control 
of the borrower or spouse, e.g., unemployment, prolonged strikes, 
medical bills not covered by insurance. Divorce is not generally viewed 
as beyond the control of the borrower and/or spouse. The circumstances 
alleged must be verified. If a borrower or spouse is self-employed, has 
been adjudicated bankrupt, and subsequently obtains a permanent 
position, a finding as to satisfactory credit risk may be made provided 
there is no derogatory credit information prior to self-employment, 
there is no derogatory credit information subsequent to the bankruptcy, 
and the failure of the business was not due to misconduct. If a 
borrower or spouse has been discharged in bankruptcy within the past 12 
months, it will not generally be possible to determine that the 
borrower or spouse is a satisfactory credit risk.
    (3) Petition under Chapter 13 of Bankruptcy Code. A petition under 
chapter 13 of the Bankruptcy Code (11 U.S.C.) filed by the borrower or 
spouse is indicative of an effort to pay their creditors. Some plans 
may provide for full payment of debts while others arrange for payment 
of scaled-down debts. Regular payments are made to a court-appointed 
trustee over a 2- to 3-year period (or up to 5 years in some cases). 
When the borrowers have made all payments in a satisfactory manner, 
they may be considered as having reestablished satisfactory credit. 
When they apply for a home loan before completion of the payout period, 
favorable consideration may nevertheless be given if at least 12 
months' worth of payments have been made satisfactorily and the Trustee 
or Bankruptcy Judge approves of the new credit.
    (4) Foreclosures. (i) When the credit information shows that the 
veteran or spouse has had a foreclosure on a prior mortgage; e.g., a 
VA-guaranteed or HUD-insured mortgage, this will not in itself 
disqualify the borrower from obtaining the loan. Lenders and field 
station personnel should refer to the preceding guidelines on 
bankruptcies for cases

[[Page 6342]]

involving foreclosures. As with a borrower who has been adjudicated 
bankrupt, it is necessary to develop complete information as to the 
facts and circumstances of the foreclosure.
    (ii) When VA pays a claim on a VA-guaranteed loan as a result of a 
foreclosure, the original veteran may be required to repay any loss to 
the Government. In some instances VA may waive the veteran's debt, in 
part or totally, based on the facts and circumstances of the case. 
However, guaranty entitlement cannot be restored unless the 
Government's loss has been repaid in full, regardless of whether or not 
the debt has been waived, compromised, or discharged in bankruptcy. 
Therefore, a veteran who is seeking a new VA loan after having 
experienced a foreclosure on a prior VA loan will in most cases have 
only remaining entitlement to apply to the new loan. The lender should 
assure that the veteran has sufficient entitlement for its secondary 
marketing purposes.
    (5) Federal debts. An applicant for a Federally-assisted loan will 
not be considered a satisfactory credit risk for such loan if the 
applicant is presently delinquent or in default on any debt to the 
Federal Government, e.g., a Small Business Administration loan, a U.S. 
Guaranteed Student loan, a debt to the Public Health Service, or where 
there is a judgment lien against the applicant's property for a debt 
owed to the Government. The applicant may not be approved for the loan 
until the delinquent account has been brought current or satisfactory 
arrangements have been made between the borrower and the Federal agency 
owed, or the judgment is paid or otherwise satisfied. Of course, the 
applicant must also be able to otherwise qualify for the loan from an 
income and remaining credit standpoint. Refinancing under VA's interest 
rate reduction refinancing provisions, however, is allowed even if the 
borrower is delinquent on the VA guaranteed mortgage being refinanced. 
Prior approval processing is required in such cases.
    (6) Absence of credit history. The fact that recently discharged 
veterans may have had no opportunity to develop a credit history will 
not preclude a determination of satisfactory credit. Similarly, other 
loan applicants may not have established credit histories as a result 
of a preference for purchasing consumer items with cash rather than 
credit. There are also cases in which individuals may be genuinely wary 
of acquiring new obligations following bankruptcy, consumer credit 
counseling (debt proration), or other disruptive credit occurrence. The 
absence of the credit history in these cases will not generally be 
viewed as an adverse factor in credit underwriting. However, before a 
favorable decision is made for cases involving bankruptcies or other 
derogatory credit factors, efforts should be made to develop evidence 
of timely payment of non-installment debts such as rent and utilities. 
It is anticipated that this special consideration in the absence of a 
credit history following bankruptcy would be the rare case and 
generally confined to bankruptcies that occurred over 3 years ago.
    (7) Consumer credit counseling plan. If a veteran, or veteran and 
spouse, have prior adverse credit and are participating in a Consumer 
Credit Counseling plan, they may be determined to be a satisfactory 
credit risk if they demonstrate 12 months' satisfactory payments and 
the counseling agency approves the new credit. If a veteran, or veteran 
and spouse, have good prior credit and are participating in a Consumer 
Credit Counseling plan, such participation is to be considered a 
neutral factor, or even a positive factor, in determining 
creditworthiness.
    (8) Re-establishment of satisfactory credit. In circumstances not 
involving bankruptcy, satisfactory credit is generally considered to be 
reestablished after the veteran, or veteran and spouse, have made 
satisfactory payments for 12 months after the date of the last 
derogatory credit item.
    (9) Long-term v. short-term debts. All known debts and obligations 
including any alimony and/or child support payments of the borrower and 
spouse must be documented. Significant liabilities, to be deducted from 
the total income in determining ability to meet the mortgage payments 
are accounts that, generally, are of a relatively long term, i.e., 10 
months or over. Other accounts for terms of less than 10 months must, 
of course, be considered in determining ability to meet family 
expenses. Certainly, any severe impact on the family's resources for 
any period of time must be considered in the loan analysis. For 
example, monthly payments of $300 on an auto loan with a remaining 
balance of $1,500 would be included in those obligations to be deducted 
from the total income regardless of the fact that the account can be 
expected to pay out in 5 months. It is clear that the applicant will, 
in this case, continue to carry the burden of those $300 payments for 
the first, most critical months of the home loan.
    (10) Requirements for verification. If the credit investigation 
reveals debts or obligations of a material nature which were not 
divulged by the applicant, lenders must be certain to obtain 
clarification as to the status of such debts from the borrower. A 
proper analysis is obviously not possible unless there is total 
correlation between the obligations claimed by the borrower and those 
revealed by a credit report or deposit verification. Conversely, 
significant debts and obligations reported by the borrower must be 
dated. If the credit report fails to provide necessary information on 
such accounts, lenders will be expected to obtain their own 
verifications of those debts directly from the creditors. Credit 
reports and verifications must be no more than 120 days old (180 days 
for new construction) to be considered valid. For loans closed 
automatically, this requirement will be considered satisfied if the 
date of the credit report or verification is within 120 days (180 days 
for new construction) of the date the note is signed. For prior 
approval loans, this requirement will be considered satisfied if the 
date of the credit report or verification is within 120 days of the 
date the application is received by VA. Of major significance are the 
applicant's rental history and outstanding or recently retired 
mortgages, if any, particularly prior VA loans. Lenders should be sure 
ratings on such accounts are obtained; a written explanation is 
required when ratings are not available. A determination is necessary 
as to whether alimony and/or child support payments are required. 
Verification of the amount of such obligations should be obtained, 
although documentation concerning an applicant's divorce should not be 
obtained automatically unless it is necessary to verify the amount of 
any alimony or child support liability indicated by the applicant. If 
in the routine course of processing the loan application, however, 
direct evidence is received (e.g., from the credit report) that an 
obligation to pay alimony or child support exists (as opposed to mere 
evidence that the veteran was previously divorced), the discrepancy 
between the loan application and credit report can and should be fully 
resolved in the same manner as any other such discrepancy would be 
handled. When a pay stub or leave-and-earnings statement indicates an 
allotment, the lender must investigate the nature of the allotment(s) 
to determine whether the allotment is related to a debt. Debts assigned 
to an ex-spouse by a divorce decree will not generally be charged 
against a veteran-borrower.
    (11) Job-related expenses. Known job-related expenses should be 
documented. This will include costs for any dependent care, significant 
commuting

[[Page 6343]]

costs, etc. When a family's circumstances are such that dependent care 
arrangements would probably be necessary, it is important to determine 
the cost of such services in order to arrive at an accurate total of 
deductions.
    (12) Credit reports. Credit reports obtained by lenders on VA-
guaranteed loan applications must be either a three-file Merged Credit 
Report (MCR) or a Residential Mortgage Credit Report (RMCR). If used, 
the RMCR must meet the standards formulated jointly by the Department 
of Veterans Affairs, Federal National Mortgage Association, Federal 
Home Loan Mortgage Corporation, Federal Housing Administration, Farmers 
Home Administration, credit repositories, repository affiliated 
consumer reporting agencies and independent consumer reporting 
agencies. All credit reports obtained by the lender must be submitted 
to VA.
    (h) Borrower's personal and financial status. The number and ages 
of dependents have an important bearing on whether income after 
deduction of fixed charges is sufficient to support the family. Type 
and duration of employment of both the borrower and spouse are 
important as an indication of stability of their employment. The amount 
of liquid assets owned by the borrower or spouse, or both, is an 
important factor in determining that they have sufficient funds to 
close the loan, as well as being significant in analyzing the overall 
qualifications for the loan. (It is imperative that adequate cash 
assets from the veteran's own resources are verified to allow the 
payment (see Sec.  36.4839(a)(3)) of any difference between the sales 
price of the property and the loan amount, in addition to that 
necessary to cover closing costs, if the sales price exceeds the 
reasonable value established by VA.) Verifications must be no more than 
120 days old (180 days for new construction) to be considered valid. 
For loans closed on the automatic basis, this requirement will be 
considered satisfied if the date of the deposit verification is within 
120 days (180 days for new construction) of the date of the veteran's 
application to the lender. For prior approval loans, this requirement 
will be considered satisfied if the verification of employment is dated 
within 120 days of the date the application is received by VA. Current 
monthly rental or other housing expense is an important consideration 
when compared to that to be undertaken in connection with the 
contemplated housing purchase.
    (i) Estimated monthly shelter expenses. It is important that 
monthly expenses such as taxes, insurance, assessments and maintenance 
and utilities be estimated accurately based on property location and 
type of house; e.g., old or new, large or small, rather than using or 
applying a ``rule of thumb'' to all properties alike. Maintenance and 
utility amounts for various types of property should be realistically 
estimated. Local utility companies should be consulted for current 
rates. The age and type of construction of a house may well affect 
these expenses. In the case of condominiums or houses in a planned unit 
development (PUD), the monthly amount of the maintenance assessment 
payable to a homeowners association should be added. If the amount 
currently assessed is less than the maximum provided in the covenants 
or master deed, and it appears likely that the amount will be 
insufficient for operation of the condominium or PUD, the amount used 
will be the maximum the veteran could be charged. If it is expected 
that real estate taxes will be raised, or if any special assessments 
are expected, the increased or additional amounts should be used. In 
special flood hazard areas, include the premium for any required flood 
insurance.
    (j) Lender responsibility. (1) Lenders are fully responsible for 
developing all credit information; i.e., for obtaining verifications of 
employment and deposit, credit reports, and for the accuracy of the 
information contained in the loan application.
    (2) Verifications of employment and deposits, and requests for 
credit reports and/or credit information must be initiated and received 
by the lender.
    (3) In cases where the real estate broker/agent or any other party 
requests any of this information, the report(s) must be returned 
directly to the lender. This fact must be disclosed by appropriately 
completing the required certification on the loan application or report 
and the parties must be identified as agents of the lender.
    (4) Where the lender relies on other parties to secure any of the 
credit or employment information or otherwise accepts such information 
obtained by any other party, such parties shall be construed for 
purposes of the submission of the loan documents to VA to be authorized 
agents of the lender, regardless of the actual relationship between 
such parties and the lender, even if disclosure is not provided to VA 
under paragraph (j)(3) of this section. Any negligent or willful 
misrepresentation by such parties shall be imputed to the lender as if 
the lender had processed those documents and the lender shall remain 
responsible for the quality and accuracy of the information provided to 
VA.
    (5) All credit reports secured by the lender or other parties as 
identified in paragraphs (j)(3) and (4) of this section shall be 
provided to VA. If updated credit reports reflect materially different 
information than that in other reports, such discrepancies must be 
explained by the lender and the ultimate decision as to the effects of 
the discrepancy upon the loan application fully addressed by the 
underwriter.
    (k) Lender certification. Lenders originating loans are responsible 
for determining and certifying to VA on the appropriate application or 
closing form that the loan meets all statutory and regulatory 
requirements. Lenders will affirmatively certify that loans were made 
in full compliance with the law and loan guaranty regulations as 
prescribed in this section.
    (1) Definitions. The definitions contained in part 42 of this 
chapter and the following definitions are applicable in this section.
    (i) Another appropriate amount. In determining the appropriate 
amount of a lender's civil penalty in cases where the Secretary has not 
sustained a loss or where two times the amount of the Secretary's loss 
on the loan involved does not exceed $10,000, the Secretary shall 
consider:
    (A) The materiality and importance of the false certification to 
the determination to issue the guaranty or to approve the assumption;
    (B) The frequency and past pattern of such false certifications by 
the lender; and
    (C) Any exculpatory or mitigating circumstances.
    (ii) Complaint. Complaint includes the assessment of liability 
served pursuant to this section.
    (iii) Defendant. Defendant means a lender named in the complaint.
    (iv) Lender. Lender includes the holder approving loan assumptions 
pursuant to 38 U.S.C. 3714.
    (2) Procedures for certification. (i) As a condition to VA issuance 
of a loan guaranty on all loans closed on or after October 27, 1994, 
and as a prerequisite to an effective loan assumption on all loans 
assumed pursuant to 38 U.S.C. 3714 on or after November 17, 1997, the 
following certification shall accompany each loan closing or assumption 
package:

    The undersigned lender certifies that the (loan) (assumption) 
application, all verifications of employment, deposit, and other 
income and credit verification documents have been processed in 
compliance with 38 CFR part 36; that all credit reports obtained or 
generated in connection with the processing of this borrower's 
(loan) (assumption) application

[[Page 6344]]

have been provided to VA; that, to the best of the undersigned 
lender's knowledge and belief the (loan) (assumption) meets the 
underwriting standards recited in chapter 37 of title 38 United 
States Code and 38 CFR part 36; and that all information provided in 
support of this (loan) (assumption) is true, complete and accurate 
to the best of the undersigned lender's knowledge and belief.

    (ii) The certification shall be executed by an officer of the 
lender authorized to execute documents and act on behalf of the lender.
    (3) Penalty. Any lender who knowingly and willfully makes a false 
certification required pursuant to Sec.  36.4840(k)(2) shall be liable 
to the United States Government for a civil penalty equal to two times 
the amount of the Secretary's loss on the loan involved or to another 
appropriate amount, not to exceed $10,000, whichever is greater.
    (l) Assessment of liability. (1) Upon an assessment confirmed by 
the Under Secretary for Benefits, in consultation with the 
Investigating Official, that a certification, as required in this 
section, is false, a report of findings of the Under Secretary for 
Benefits shall be submitted to the Reviewing Official setting forth:
    (i) The evidence that supports the allegations of a false 
certification and of liability;
    (ii) A description of the claims or statements upon which the 
allegations of liability are based;
    (iii) The amount of the VA demand to be made; and
    (iv) Any exculpatory or mitigating circumstances that may relate to 
the certification.
    (2) The Reviewing Official shall review all of the information 
provided and will either inform the Under Secretary for Benefits and 
the Investigating Official that there is not adequate evidence, that 
the lender is liable, or serve a complaint on the lender stating:
    (i) The allegations of a false certification and of liability;
    (ii) The amount being assessed by the Secretary and the basis for 
the amount assessed;
    (iii) Instructions on how to satisfy the assessment and how to file 
an answer to request a hearing, including a specific statement of the 
lender's right to request a hearing by filing an answer and to be 
represented by counsel; and
    (iv) That failure to file an answer within 30 days of the complaint 
will result in the imposition of the assessment without right to appeal 
the assessment to the Secretary.
    (m) Hearing procedures. A lender hearing on an assessment 
established pursuant to this section shall be governed by the 
procedures recited at 38 CFR 42.8 through 42.47.
    (n) Additional remedies. Any assessment under this section may be 
in addition to other remedies available to VA, such as debarment and 
suspension pursuant to 38 U.S.C. 3704 and 2 CFR parts 180 and 801 or 
loss of automatic processing authority pursuant to 38 U.S.C. 3702, or 
other actions by the Government under any other law including but not 
limited to title 18 U.S.C. and 31 U.S.C. 3732.

(Authority 38 U.S.C. 3703(c)(1), 3710(g))

(The Office of Management and Budget has approved the information 
collection requirements of this section under control number 2900-
0521.)


Sec.  36.4841  Death or insolvency of holder.

    (a) Immediately upon the death of the holder and without the 
necessity of request or other action by the debtor or the Secretary, 
all sums then standing as a credit balance in a trust, or deposit, or 
other account to cover taxes, insurance accruals, or other items in 
connection with the loan secured by the encumbered property, whether 
stated to be such or otherwise designated, and which have not been 
credited on the note shall, nevertheless, be treated as a setoff and 
shall be deemed to have been credited thereon as of the date of the 
last debit to such account, so that the unpaid balance of the note as 
of that date will be reduced by the amount of such credit balance: 
Provided, that any unpaid taxes, insurance premiums, ground rents, or 
advances may be paid by the holder of the indebtedness, at the holder's 
option, and the amount which otherwise would have been deemed to have 
been credited on the note reduced accordingly. This paragraph shall be 
applicable whether the estate of the deceased holder is solvent or 
insolvent.
    (b) The provisions of paragraph (a) of this section shall also be 
applicable in the event of:
    (1) Insolvency of holder;
    (2) Initiation of any bankruptcy or reorganization, or liquidation 
proceedings as to the holder, whether voluntary or involuntary;
    (3) Appointment of a general or ancillary receiver for the holder's 
property; or in any case; or
    (4) Upon the written request of the debtor if all secured and due 
insurance premiums, taxes, and ground rents have been paid, and 
appropriate provisions made for future accruals.
    (c) Upon the occurrence of any of the events enumerated in 
paragraph (a) or (b) of this section, interest on the note and on the 
credit balance of the deposits mentioned in paragraph (a) shall be set 
off against each other at the rate payable on the principal of the 
note, as of the date of last debit to the deposit account. Any excess 
credit of interest shall be treated as a set-off against the unpaid 
advances, if any, and the unpaid balance of the note.
    (d) The provisions of paragraphs (a), (b) and (c) of this section 
shall apply also to corporations. The dissolution thereof by expiration 
of charter, by forfeiture, or otherwise shall be treated as is the 
death of an individual as provided in paragraph (a) of this section.

(Authority 38 U.S.C. 3703(c)(1), 3720)

Sec.  36.4842  Qualification for designated fee appraisers.

    To qualify for approval as a designated fee appraiser, an applicant 
must show to the satisfaction of the Secretary that his or her 
character, experience, and the type of work in which he or she has had 
experience for at least 5 years qualifies the applicant to competently 
appraise and value within a prescribed area the type of property to 
which the approval relates.

(Authority 38 U.S.C. 3703(c)(1), 3731)

Sec.  36.4843  Restriction on designated fee appraisers.

    (a) A designated fee appraiser shall not make an appraisal, 
excepting of alterations, improvements, or repairs to real property 
entailing a cost of not more than $3,500, if such appraiser is an 
officer, director, trustee, employer, or employee of the lender, 
contractor, or vendor.
    (b) An appraisal made by a designated fee appraiser shall be 
subject to review and adjustment by the Secretary. The amount 
determined to be proper upon any such review or adjustment shall 
constitute the ``reasonable value'' for the purpose of determining the 
eligibility of the related loan.

(Authority 38 U.S.C. 3703(c)(1), 3731)

Sec.  36.4845  Delegation of authority.

    (a) Except as hereinafter provided, each employee of the Department 
of Veterans Affairs heretofore or hereafter appointed to, or lawfully 
filling, any position designated in paragraph (b) of this section is 
hereby delegated authority, within the limitations and conditions 
prescribed by law, to exercise the powers and functions of the 
Secretary with respect to the guaranty or insurance of loans and the 
rights and liabilities arising therefrom, including but not limited to 
the adjudication and allowance, disallowance, and compromise of claims; 
the collection or compromise of amounts due, in money

[[Page 6345]]

or other property; the extension, rearrangement, or acquisition of 
loans; the management and disposition of secured and unsecured notes 
and other property; and those functions expressly or impliedly embraced 
within paragraphs (2) through (6) of 38 U.S.C. 3720(a). Incidental to 
the exercise and performance of the powers and functions hereby 
delegated, each such employee is authorized to execute and deliver 
(with or without acknowledgment) for, and on behalf of, the Secretary, 
evidence of guaranty or of insurance credits and such certificates, 
forms, conveyances, and other instruments as may be appropriate in 
connection with the acquisition, ownership, management, sale, transfer, 
assignment, encumbrance, rental, or other disposition of real or 
personal property, or, of any right, title, or interest therein, 
including, but not limited to, contracts of sale, installment 
contracts, deeds, leases, bills of sale, assignments, and releases; and 
to approve disbursements to be made for any purpose authorized by 38 
U.S.C. chapter 37.
    (b)(1) Designated positions are as follows:
    (i) Under Secretary for Benefits.
    (ii) Director, Loan Guaranty Service.
    (iii) Director, Medical and Regional Office Center.
    (iv) Director, VA Regional Office and Insurance Center.
    (v) Director, Regional Office.
    (vi) Loan Guaranty Officer.
    (vii) Assistant Loan Guaranty Officer.
    (2) The authority hereby delegated to employees of the positions 
designated in paragraph (b)(1) of this section may, with the approval 
of the Under Secretary for Benefits, be redelegated.
    (c) Nothing in this section shall be construed--
    (1) To authorize any such employee to exercise the authority vested 
in the Secretary under 38 U.S.C. 501 or 3703(a)(2) or to sue, or enter 
appearance for and on behalf of the Secretary, or confess judgment 
against the Secretary in any court without the Secretary's prior 
authorization; or
    (2) To include the authority to exercise those powers delegated to 
the Under Secretary for Benefits, or the Director, Loan Guaranty 
Service, under Sec. Sec.  36.4823(e), 36.4838 or 36.4846, Provided, 
that, anything in the regulations concerning guaranty or insurance of 
loans to veterans to the contrary notwithstanding, any evidence of 
guaranty or insurance issued on or after July 1, 1948, by any of the 
employees designated in paragraph (b) of this section or by any 
employee designated an authorized agent or a loan guaranty agent shall 
be deemed to have been issued by the Secretary, subject to the defenses 
reserved in 38 U.S.C. 3721.
    (d) Each Regional Office, Regional Office and Insurance Center, and 
Medical and Regional Office Center shall maintain and keep current a 
cumulative list of all employees of that Office or Center who, since 
May 1, 1980, have occupied the positions of Director, Loan Guaranty 
Officer, and Assistant Loan Guaranty Officer. This list will include 
each employee's name, title, date the employee assumed the position, 
and the termination date, if applicable, of the employee's tenure in 
such position. The list shall be available for public inspection and 
copying at the Regional Office, or Center, during normal business 
hours.
    (e)(1) Authority is hereby delegated to the officers, designated in 
paragraph (e)(2) of this section, of the entity performing loan 
servicing functions under a contract with the Secretary to execute on 
behalf of the Secretary all documents necessary for the servicing and 
termination of a loan made or acquired by the Secretary pursuant to 38 
U.S.C. chapter 37 (other than under subchapter vi of that chapter). 
Documents executed under this paragraph include but are not limited to: 
Loan modification agreements, notices of default and other documents 
necessary for loan foreclosure or termination, notices of appointment 
or substitution of trustees under mortgages or deeds of trust, releases 
or satisfactions of mortgages or deeds of trust, acceptance of deeds-
in-lieu of foreclosure, loan assumption agreements, loan assignments, 
deeds tendered upon satisfaction or conversion of an installment land 
sales contract, and documents related to filing, pursuing and settling 
claims with insurance companies relating to hazard coverage on 
properties securing loans being serviced.
    (2) The designated officers are:
    (i) Vice President;
    (ii) Assistant Vice President; and
    (iii) Assistant Secretary.
    (3) The Director, Loan Guaranty Service, Washington, DC, shall 
maintain a log listing all persons authorized to execute documents 
pursuant to paragraph (e) of this section and the dates such persons 
held such authority, together with certified copies of resolutions of 
the board of directors of the entity authorizing such individuals to 
perform the functions specified in paragraph (e)(1) of this section. 
These records shall be available for public inspection and copying at 
the Office of the Director of VA Loan Guaranty Service, Washington, DC 
20420.
    (f)(1) Authority is hereby delegated to the officers, designated in 
paragraph (f)(2) of this section, of the entity performing property 
management and sales functions under a contract with the Secretary to 
execute on behalf of the Secretary all documents necessary for the 
management and sales of residential real property acquired by the 
Secretary pursuant to 38 U.S.C. chapter 37. Documents executed under 
this paragraph include but are not limited to: Sales contracts, deeds, 
documents relating to removing adverse occupants, and any documents 
relating to sales closings. The authorization to execute deeds is 
limited to deeds other than general warranty deeds.
    (2) The designated officers are:
    (i) Senior Vice President;
    (ii) Vice President;
    (iii) Assistant Vice President;
    (iv) Assistant Secretary;
    (v) Director;
    (vi) Senior Manager; and
    (vii) Regional Manager.
    (3) The Director, Loan Guaranty Service, Washington, DC, shall 
maintain a log listing all persons authorized to execute documents 
pursuant to paragraph (f) of this section and the dates such persons 
held such authority, together with certified copies of resolutions of 
the board of directors of the entity authorizing such individuals to 
perform the functions specified in paragraph (f)(1) of this section. 
These records shall be available for public inspection and copying at 
the Office of the Director of VA Loan Guaranty Service, Washington, DC 
20420.

(Authority: 38 U.S.C. 3720(a)(5))

Sec.  36.4846  Cooperative loans.

    (a) To be eligible for guaranty or insurance, any loan of the 
following types shall require prior approval of the Under Secretary for 
Benefits, or the Director, Loan Guaranty Service, who may issue such 
approval upon such conditions and limitations deemed appropriate, not 
inconsistent with the provisions of 38 U.S.C. chapter 37 and this 
subpart:
    (1) Any loan which is related to an enterprise in which more than 
10 individuals will participate; or
    (2) Any loan to be made for the purchase or construction of 
residential units in any housing development, cooperative or otherwise, 
the title to which development or to the individual units therein is 
not to be held directly by the veteran-participants, or which 
contemplates the ownership or maintenance of more than three units or 
of their major appurtenances in common.

[[Page 6346]]

    (b) The issuance of such approval with respect to a residential 
development under paragraph (a)(2) of this section also shall be 
subject to such conditions and stipulation as in the judgment of the 
approving officer are possible and proper to:
    (1) Afford reasonable and feasible protection to the rights of the 
Government as guarantor or insurer, and as subrogee, and to each 
veteran-participant against loss of his or her respective equity 
consequent upon the failure of other participants to discharge their 
obligations;
    (2) Provide for a reasonable and workable plan for the operation 
and management of the project;
    (3) Limit the personal liability of each veteran-participant to 
those sums allocable on a proper ratable basis to the purchase, cost, 
and maintenance of his or her individual unit or participating 
interest; and
    (4) Limit commercial features to those reasonably calculated to 
promote the economic soundness of the project and the living 
convenience of the participants, retaining the essential character of a 
residential project.
    (c) No such project, development, or enterprise may be approved 
which involves an initial grouping of more than 500 veterans, or a cost 
of more than five million dollars, unless it is conclusively shown to 
the satisfaction of the approving officer that a greater number of 
veterans or dollar amount will assure substantial advantages to the 
veteran-participants which could not be achieved in a smaller project.
    (d) When approved as in this section provided, and upon performance 
of the conditions indicated in the prior approval, proper guaranty 
certificate or certificates may be issued in connection with the loan 
or loans to be guaranteed on behalf of eligible veterans participating 
in the project, development or enterprise not to exceed in total amount 
the sum of the guaranties applied for by the individual participants 
and for which guaranty each participant is then eligible.
    (e) In lieu of guaranty as authorized in paragraph (d) of this 
section, insurance shall be available on application by the lender and 
all veterans concerned. In such case the insurance credit shall be 
limited to 15 percent of the obligation of the veteran applicant 
(subject to available eligibility) and the total insurance credit in 
respect to the veterans' loans involved in the project shall not exceed 
15 percent of the aggregate of the principal sums of the individual 
indebtedness incurred by the veterans participating in the project for 
the purpose of acquiring their respective interests therein.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4847  Lender appraisal processing program.

    (a) Delegation of authority to lenders to review appraisals and 
determine reasonable value.
    (1) To be eligible for delegation of authority to review VA 
appraisals and determine the reasonable value of properties to be 
purchased with VA guaranteed loans, a lender must--
    (i) Have automatic processing authority under 38 U.S.C. 3702(d), 
and
    (ii) Employ one or more staff appraisal reviewers acceptable to the 
Secretary.
    (2) To qualify as a lender's staff appraisal reviewer an applicant 
must be a full-time member of the lender's permanent staff and may not 
be employed by, or perform services for, any other mortgagee. The 
individual must not engage in any private pursuits in which there will 
be, or appear to be, any conflict of interest between those pursuits 
and his/her duties, responsibilities, and performance as a Lender 
Appraisal Processing Program (LAPP) staff appraisal reviewer. Three 
years of experience is necessary to qualify as a lender's staff 
appraisal reviewer. That experience must demonstrate a knowledge of, 
and the ability to apply industry-accepted principles, methods, 
practices and techniques of appraising, and the ability to competently 
determine the value of property within a prescribed geographical area. 
The individual must demonstrate the ability to review the work of 
others and to recognize deviations from accepted appraisal principles, 
practices, and techniques; errors in computations, and unjustifiable 
and unsupportable conclusions.
    (3) Lenders that meet the requirements of 38 U.S.C. 3702(d), and 
have a staff appraisal reviewer determined acceptable by VA, will be 
authorized to review appraisals and make reasonable value 
determinations on properties that will be security for VA guaranteed 
loans. The lender's authorization will be subject to a one-year 
probationary period. Additionally, lenders must satisfy initial and 
subsequent VA office case review requirements prior to being allowed to 
determine reasonable value without VA involvement. The initial office 
case review requirement must be satisfied in the VA regional office in 
whose jurisdiction the lender's staff appraisal reviewer is located 
before the LAPP authority may be utilized by that lender in any other 
VA office's jurisdiction. To satisfy the initial office case review 
requirement, the first five cases of each lender staff appraisal 
reviewer involving properties in the regional office location where the 
staff appraisal reviewer is located will be processed by him or her up 
to the point where he or she has made a reasonable value determination 
and fully drafted, but not issued, the lender's notification of 
reasonable value letter to the veteran. At that point, and prior to 
loan closing, each of the five cases will be submitted to the local VA 
office. After a staff review of each case, VA will issue a Certificate 
of Reasonable Value, which the lender may use in closing the loan 
automatically if it meets all other requirements of the VA. If these 
five cases are found to be acceptable by VA, the lender's staff 
appraisal reviewer will be allowed to fully process subsequent 
appraisals for properties located in that VA office's jurisdiction 
without prior submission to VA and issuance by VA of a Certificate of 
Reasonable Value. Lenders must also satisfy a subsequent VA office case 
review requirement in each additional VA office location in which they 
desire to extend and utilize this authority. Under this requirement, 
the lender must have first satisfied the initial office case review 
requirement and then must submit to the additional VA office(s) the 
first case each staff appraisal reviewer processes in the jurisdiction 
of that office. As provided under the initial office case review 
requirement, VA office personnel will issue a Certificate of Reasonable 
Value for this case and subsequently determine the acceptability of the 
lender's staff appraisal reviewer's processing. If VA finds this first 
case to be acceptable, the lender's staff appraisal reviewer will be 
allowed to fully process subsequent cases in that additional VA 
office's jurisdiction without prior submission to VA. The initial and 
subsequent office case review requirements may be expanded by VA if 
acceptable performance has not been demonstrated. After satisfaction of 
the initial and subsequent office case review requirements, routine 
reviews of LAPP cases will be made by VA staff based upon quality 
control procedures established by the Under Secretary for Benefits. 
Such review will be made on a random sampling or performance related 
basis. During the probationary period a high percentage of reviews will 
be made by VA staff.
    (4) The following certification by the lender's nominated staff 
appraisal reviewer must be provided with the lender's application for 
delegation of LAPP authority:


[[Page 6347]]


    I hereby acknowledge and represent that by signing the Uniform 
Residential Appraisal Report (URAR), FHLMC (Federal Home Loan 
Mortgage Corporation) Form 70/FNMA (Federal Notice Mortgage 
Association) Form 1004, I am certifying, in all cases, that I have 
personally reviewed the appraisal report. In doing so I have 
considered and utilized recognized professional appraisal 
techniques, have found the appraisal report to have been prepared in 
compliance with applicable VA requirements, and concur with the 
recommendations of the fee appraiser, who was assigned by VA to the 
case. Furthermore, in those cases where clarifications or 
corrections have been requested from the VA fee appraiser there has 
been no pressure or influence exerted on that appraiser to remove or 
change information that might be considered detrimental to the 
subject property, or VA's interests, or to reach a predetermined 
value for that property. Signature of Staff Appraisal Reviewer.

    (5) Other certifications required from the lender will be specified 
with particularity in the separate instructions issued by the 
Secretary, as noted in Sec.  36.4847(b).
    (b) Instructions for LAPP Procedures. The Secretary will publish 
separate instructions for processing appraisals under the Lenders 
Appraisal Processing Program. Compliance with these regulations and the 
separate instructions issued by the Secretary is deemed by VA to be the 
minimum exercise of due diligence in processing LAPP cases. Due 
diligence is considered by VA to represent that care, as is to be 
properly expected from, and ordinarily exercised by, reasonable and 
prudent lenders who would be dependent on the property as security to 
protect its investment.
    (c) VA minimum property requirements. Lenders are responsible for 
determining that the property meets VA minimum property requirements. 
The separate instructions issued by the Secretary will set forth the 
lender's ability to adjust, remove, or alter the fee appraiser's or fee 
compliance inspector's recommendations concerning VA minimum property 
requirements. Condominiums, planned-unit developments and leasehold 
estates must have been determined acceptable by VA. A condominium or 
planned-unit development which is acceptable to the Department of 
Housing and Urban Development or the Department of Agriculture may also 
be acceptable to VA.
    (d) Adjustment of value recommendations. The amount of authority to 
upwardly adjust the fee appraiser's estimated market value during the 
lender staff appraisal reviewer's initial review of the appraisal 
report or to subsequently process an appeal of the lender's established 
reasonable value will be specified in the separate instructions issued 
by VA as noted in Sec.  36.4847(b). The amount specified must not in 
any way be considered an administrative adjustment figure which may be 
applied indiscriminately and without valid basis or justification with 
the sole purpose of reaching an amount necessary to complete the sale 
or mortgage transaction.
    (1) Adjustment during initial review. Any adjustment during the 
staff appraisal reviewer's initial review of the appraisal report must 
be fully and clearly justified in writing on the appraisal report form 
or, if necessary, on an addendum. The basis for the adjustment must be 
adequate and reasonable by professional appraisal standards. If real 
estate market or other valid data was utilized in arriving at the 
decision to make the adjustment, such data must be attached to the 
appraisal report. All adjustments, comments, corrections, 
justifications, etc., to the appraisal report must be made in a 
contrasting color, be clearly legible, and signed and dated by the 
staff appraisal reviewer.
    (2) Processing appeals. The authority provided under 38 U.S.C. 
3731(d) which permits a lender to obtain a VA fee panel appraiser's 
report which VA is obligated to consider in an appeal of the 
established reasonable value shall not apply to cases processed under 
the authority provided by this section. All appeals of VA fee 
appraisers' estimated market values or lenders' reasonable value 
determinations above the amount specified in the separate instructions 
issued by VA must be submitted, along with the lender's 
recommendations, if any, to VA for processing and final determination. 
Unless otherwise authorized in the separate instructions lenders must 
also submit appeals, regardless of the amount, to VA in all cases where 
the staff appraisal reviewer has made an adjustment during their 
initial review of the appraisal report to the fee appraiser's market 
value estimate. The fee appraiser's estimated market value or lender's 
reasonable value determination may be increased only when such increase 
is clearly warranted and fully supported by real estate market or other 
valid data considered adequate and reasonable by professional appraisal 
standards and the lender's staff appraisal reviewer clearly and fully 
justifies the reasoning and basis for the increase in writing on the 
appraisal report form or an addendum. The staff appraisal reviewer must 
date and sign the written justification and must cite within it the 
data used in arriving at the decision to make the increase. All such 
data shall be attached to the appraisal report form and any addendum.
    (e) Notification. It will be the responsibility of the lender to 
notify the veteran borrower in writing of the determination of 
reasonable value and related conditions specific to the property and to 
provide the veteran with a copy of the appraisal report. Any delay in 
processing the notification of value must be documented. Any delay of 
more than five work days between the date of the lender's receipt of 
the fee appraiser's report and date of the notification of value to the 
veteran, without reasonable and documented extenuating circumstances, 
will not be acceptable. A copy of the lender notification letter to the 
veteran and the appraisal report must be forwarded to the VA office of 
jurisdiction at the same time the veteran is notified. In addition, the 
original appraisal report, related appraisal documentation, and a copy 
of the reasonable value determination notification to the veteran must 
be submitted to the VA with the request for loan guaranty.
    (f) Indemnification. When the Secretary has incurred a loss as a 
result of a payment of claim under guaranty and in which the Secretary 
determines an increase made by the lender under Sec.  36.4847(d) was 
unwarranted, or arbitrary and capricious, the lender shall indemnify 
the Secretary to the extent the Secretary determines such loss was 
caused, or increased, by the increase in value.
    (g) Affiliations. A lender affiliated with a real estate firm 
builder, land developer or escrow agent as a subsidiary division, 
investment or any other entity in which it has a financial interest or 
which it owns may not use this authority for any cases involving the 
affiliate unless the lender demonstrates to the Secretary's 
satisfaction that the lender and its affiliate(s) are essentially 
separate entities that operate independently of each other, free of all 
cross-influences (e.g., a formal corporate agreement exists which 
specifically sets forth this fact).
    (h) Quality Control Plans. The lender must have an effective self-
policing or quality control system to ensure the adequacy and quality 
of their LAPP staff appraisal reviewer's processing and, that its 
activities do not deviate from high standards of integrity. The quality 
control system must include frequent, periodic audits that specifically 
address the appraisal review activity. These audits may be performed by 
an independent party, or by the lender's independent internal audit 
division which reports directly to the firm's chief

[[Page 6348]]

executive officer. The lender must agree to furnish findings and 
information under this system to VA on demand. While the quality 
control personnel need not be appraisers, they should have basic 
familiarity with appraisal theory and techniques and the ability to 
prescribe appropriate corrective action(s) in the appraisal review 
process when discrepancies or problems are identified. The basic 
elements of the system will be described in separate instructions 
issued by the Secretary. Copies of the lender's quality control plan or 
self-policing system evidencing appraisal related matters must be 
provided to the VA office of jurisdiction with the lender's application 
for LAPP authority.
    (i) Fees. The Secretary may require mortgagees to pay an 
application fee and/or annual fees, including additional fees for each 
branch office authorized to process cases under the authority delegated 
under this section, in such amounts and at such times as the Secretary 
may require.
    (j) Withdrawal of lender authority. The authority for a lender to 
determine reasonable value may be withdrawn by the Loan Guaranty 
Officer when proper cause exists. A lender's authority to make 
reasonable value determinations shall be withdrawn when the lender no 
longer meets the basic requirements for delegating the authority, or 
when it can be shown that the lender's reasonable value determinations 
have not been made in accordance with VA regulations, requirements, 
guidelines, instructions or applicable laws, or when there is adequate 
evidence to support reasonable belief by VA that a particular 
unacceptable act, practice, or performance by the lender or the 
lender's staff has occurred. Such acts, practices or performance 
include, but are not limited to: Demonstrated technical incompetence 
(i.e., conduct which demonstrates an insufficient knowledge of industry 
accepted appraisal principles, techniques and practices; or the lack of 
technical competence to review appraisal reports and make value 
determinations in accordance with those requirements); substantive or 
repetitive errors (i.e., any error(s) of a nature that would materially 
or significantly affect the determination of reasonable value or 
condition of the property; or a number or series of errors that, 
considered individually, may not significantly impact the determination 
of reasonable value or property condition, but which when considered in 
the aggregate would establish that appraisal reviews or LAPP case 
processing are being performed in a careless or negligent manner), or 
continued instances of disregard for VA requirements after they have 
been called to the lender's attention.
    (1) Withdrawal of authority by the Loan Guaranty Officer may be 
either for an indefinite or a specified period of time. For any 
withdrawal longer than 90 days, a reapplication for lender authority to 
process appraisals under these regulations will be required. Written 
notice will be provided at least 30 days in advance of withdrawal 
unless the Government's interests are exposed to immediate risk from 
the lender's activities in which case the withdrawal will be effected 
immediately. The notice will clearly and specifically set forth the 
basis and grounds for the action. There is no right to a formal hearing 
to contest the withdrawal of LAPP processing privileges. However, if 
within 15 days after receiving notice the lender requests an 
opportunity to contest the withdrawal, the lender may submit, in 
person, in writing, or through a representative, information and 
argument to the Loan Guaranty Officer in opposition to the withdrawal. 
The Loan Guaranty Officer will make a recommendation to the Regional 
Office Director who shall make the determination as to whether the 
action should be sustained, modified or rescinded. The lender will be 
informed in writing of the decision.
    (2) The lender has the right to appeal the Regional Office 
Director's decision to the Under Secretary for Benefits. In the event 
of such an appeal, the Under Secretary for Benefits will review all 
relevant material concerning the matter and make a determination that 
shall constitute final agency action. If the lender's submission of 
opposition raises a genuine dispute over facts material to the 
withdrawal of LAPP authority, the lender will be afforded an 
opportunity to appear with a representative, submit documentary 
evidence, present witnesses and confront any witness the Veterans 
Benefits Administration presents. The Under Secretary for Benefits will 
appoint a hearing officer or panel to conduct the hearing. When such 
additional proceedings are necessary, the Under Secretary for Benefits 
shall base the determination on the facts as found, together with any 
information and argument submitted by the lender.
    (3) In actions based upon a conviction or civil judgment, or in 
which there is no genuine dispute over material facts, the Under 
Secretary for Benefits shall make a decision on the basis of all the 
information in the administrative record, including any submission made 
by the lender.
    (4) Withdrawal of the LAPP authority will require that VA make 
subsequent determinations of reasonable value for the lender. 
Consequently, VA staff will review each appraisal report and issue a 
Certificate of Reasonable Value which can then be used by the lender to 
close loans on either the prior VA approval or automatic basis.
    (5) Withdrawal by VA of the lender's LAPP authority does not 
prevent VA from also withdrawing automatic processing authority or 
taking debarment or suspension action based upon the same conduct by 
the lender.

(Authority: 38 U.S.C. 3731)

(The Office of Management and Budget has approved the information 
collections requirements of this section under control numbers 2900-
0045 and 2900-0513.)


Sec.  36.4848  Servicer Appraisal Processing Program.

    (a) Delegation of authority to servicers to review liquidation 
appraisals and determine reasonable value. Based on the reasonable 
value, the servicer will be able to determine net value.
    (1) To be eligible for delegation of authority to review VA 
liquidation appraisals and determine the reasonable value for 
liquidation purposes on properties secured by VA guaranteed or insured 
loans, a lender must:
    (i) Have automatic processing authority under 38 U.S.C. 3702(d), 
and
    (ii) Employ one or more Staff Appraisal Reviewers (SAR) acceptable 
to the Secretary.
    (2) To qualify as a servicer's staff appraisal reviewer an 
applicant must be a full-time member of the servicer's permanent staff 
and may not be employed by, or perform services for, any other 
mortgagee. The individual must not engage in any private pursuits in 
which there will be, or appear to be, any conflict of interest between 
those pursuits and his/her duties, responsibilities, and performance as 
a Servicer Appraisal Processing Program (SAPP) staff appraisal 
reviewer. Three years of appraisal related experience is necessary to 
qualify as a servicer's staff appraisal reviewer. That experience must 
demonstrate knowledge of, and the ability to apply industry-accepted 
principles, methods, practices and techniques of appraising, and the 
ability to competently determine the value of property. The individual 
must demonstrate the ability to review the work of others and to 
recognize deviations from accepted appraisal principle, practices, and 
techniques, error in computations, and unjustifiable and unsupportable 
conclusions.
    (3) Servicers that have a staff appraisal reviewer determined

[[Page 6349]]

acceptable to VA, will be authorized to review liquidation appraisals 
and make reasonable value determinations for liquidation purposes on 
properties that are the security for VA guaranteed or insured loans. 
Additionally, servicers must satisfy initial VA office case review 
requirements prior to being allowed to determine reasonable value 
without VA involvement. The initial office case review requirement must 
be satisfied in the VA regional loan center in whose jurisdiction the 
servicer's staff appraisal reviewer is located before the SAPP 
authority may be utilized by that servicer in any other VA office's 
jurisdiction. To satisfy the initial office case review requirement, 
the first five cases of each servicer staff appraisal reviewer 
involving properties in the regional office location where the staff 
appraisal reviewer is located will be processed by him or her up to the 
point where he or she has made a reasonable value determination and 
fully drafted, but not issued, the servicer's notice of value. At that 
point, and prior to loan termination, each of the five cases will be 
submitted to the VA regional loan center having jurisdiction over the 
property. After a staff review of each case, VA will issue a notice of 
value which the servicer may use to compute the net value of the 
property for liquidation purposes. If these five cases are found to be 
acceptable by VA, the servicer's staff appraisal reviewer will be 
allowed to fully process subsequent appraisals for properties 
regardless of jurisdictional location without prior submission to VA 
and issuance by VA of a notice of value. Where the servicer's reviewer 
cannot readily meet the jurisdictional review requirement, the SAR 
applicant may request that VA expand the geographic area of 
consideration. VA will accommodate such requests if practicable. The 
initial office case review requirement may be expanded by VA if 
acceptable performance has not been demonstrated. After satisfaction of 
the initial office case review requirement, routine reviews of SAPP 
cases will be made by VA staff based upon quality control procedures 
established by the Undersecretary for Benefits. Such review will be 
made on a random sampling or performance related basis.
    (4) Certifications required from the servicer will be specified 
with particularity in the separate instructions issued by the 
Secretary, as noted in Sec.  36.4848(b).
    (b) Instructions for SAPP Procedures. The Secretary will publish 
separate instructions for processing appraisals under the Servicer 
Appraisal Processing Program. Compliance with these regulations and the 
separate instructions issued by the Secretary is deemed by VA to be the 
minimum exercise of due diligence in processing SAPP cases. Due 
diligence is considered by VA to represent that care, as is to be 
properly expected from, and ordinarily exercised by, a reasonable and 
prudent servicer who would be dependent on the property as security to 
protect its investment.
    (c) Adjustment of value recommendations. The amount of authority to 
upwardly adjust the fee appraiser's estimated market value during the 
servicer staff appraisal reviewer's initial review of the appraisal 
report or to subsequently process an appeal of the servicer's 
established reasonable value will be specified in the separate 
instructions issued by VA as noted in Sec.  36.4848(b). The amount 
specified must not in any way be considered an administrative 
adjustment figure which may be applied indiscriminately and without 
valid basis or justification.
    (1) Adjustment during initial review. Any adjustment during the 
staff appraisal reviewer's initial review of the appraisal report must 
be fully and clearly justified in writing on the appraisal report form 
or, if necessary, on an addendum. The basis for the adjustment must be 
adequate and reasonable by professional appraisal standards. If real 
estate market or other valid data was utilized in arriving at the 
decision to make the adjustment, such data must be attached to the 
appraisal report. All adjustments, comments, corrections, 
justifications, etc., to the appraisal report must be made in a 
contrasting color, be clearly legible, and signed and dated by the 
staff appraisal reviewer.
    (2) Processing appeals. The authority provided under 38 U.S.C. 
3731(d) which permits a lender to obtain a VA fee panel appraiser's 
report which VA is obligated to consider in an appeal of the 
established reasonable value shall not apply to cases processed under 
the authority provided by this section. All appeals of VA fee 
appraiser's estimated market values or servicer's reasonable value 
determinations above the amount specified in the separate instructions 
issued by VA must be submitted, along with the servicer's 
recommendations, if any, to VA for processing and final determination. 
Unless otherwise authorized in the separate instructions servicers must 
also submit appeals, regardless of the amount, to VA in all cases where 
the staff appraisal reviewer has made an adjustment during their 
initial review of the appraisal report to the fee appraiser's market 
value estimate. The fee appraiser's estimated market value or 
servicer's reasonable value determination may be increased only when 
such increase is clearly warranted and fully supported by real estate 
market or other valid data considered adequate and reasonable by 
professional appraisal standards and the servicer's staff appraisal 
reviewer clearly and fully justifies the reasoning and basis for the 
increase in writing on the appraisal report form or an addendum. The 
staff appraisal reviewer must date and sign the written justification 
and must cite within it the data used in arriving at the decision to 
make the increase. All such data shall be attached to the appraisal 
report form and any addendum.
    (d) Indemnification. When the Secretary has incurred a loss as a 
result of a payment of claim under guaranty and in which the Secretary 
determines an increase made by the servicer under Sec.  36.4848(c) was 
unwarranted, or arbitrary and capricious, the lender shall indemnify 
the Secretary to the extent the Secretary determines such loss was 
caused or increased, by the increase in value.
    (e) Affiliations. A servicer affiliated with a real estate firm, 
builder, land developer or escrow agent as a subsidiary division, or in 
any other entity in which it has a financial interest or which it owns 
may not use the authority for any cases involving the affiliate unless 
the servicer demonstrates to the Secretary's satisfaction that the 
servicer and its affiliate(s) are essentially separate entities that 
operate independently of each other, free of all cross-influences 
(e.g., a formal corporate agreement exists which specifically sets 
forth this fact).
    (f) Quality control plans. The servicer must have an effective 
self-policing or quality control system to ensure the adequacy and 
quality of their SAPP staff appraisal reviewer's processing and, that 
its activities do not deviate from high standards of integrity. The 
quality control system must include frequent, periodic audits that 
specifically address the appraisal review activity. These audits may be 
performed by an independent party, or by the servicer's independent 
internal audit division which reports directly to the firm's chief 
executive officer. The servicer must agree to furnish findings and 
information under this system to VA on demand. While the quality 
control personnel need not be appraisers, they should have basic 
familiarity with appraisal theory and techniques and the ability to 
prescribe appropriate corrective action(s) in the appraisal

[[Page 6350]]

review process when discrepancies or problems are identified. The basic 
elements of the system will be described in separate instructions 
issued by the Secretary. Copies of the lender's quality control plan or 
self-policing system evidencing appraisal related matters must be 
provided to the VA office of jurisdiction with the servicer's 
application of SAPP authority.
    (g) Fees. The Secretary will require servicers to pay a $100.00 
application fee for each SAR the servicer nominates for approval. The 
application fee will also apply if the SAR begins work for another 
servicer.
    (h) Withdrawal of servicer authority. The authority for a servicer 
to determine reasonable value may be withdrawn by the Loan Guaranty 
Officer when proper cause exists. A servicer's authority to make 
reasonable value determinations shall be withdrawn when the servicer no 
longer meets the basic requirements for delegating the authority, or 
when it can be shown that the servicer's reasonable value 
determinations have not been made in accordance with VA regulations, 
requirements, guidelines, instructions or applicable laws, or when 
there is adequate evidence to support reasonable belief by VA that a 
particular unacceptable act, practice, or performance by the servicer 
or the servicer's staff has occurred. Such acts, practices, or 
performance include, but are not limited to: Demonstrated technical 
incompetence (i.e., conduct which demonstrates an insufficient 
knowledge of industry accepted appraisal principles, techniques and 
practices; or the lack of technical competence to review appraisal 
reports and make value determinations in accordance with those 
requirements); substantive or repetitive errors (i.e., any error(s) of 
a nature that would materially or significantly affect the 
determination of reasonable value or condition of the property; or a 
number or series of errors that, considered individually, may not 
significantly impact the determination of reasonable value or property 
condition, but which when considered in the aggregate would establish 
that appraisal reviews or SAPP case processing are being performed in a 
careless or negligent manner), or continued instances of disregard for 
VA requirements after they have been called to the servicer's 
attention.
    (1) Withdrawal of authority by the Loan Guaranty Officer may be 
either for an indefinite or a specified period of time. For any 
withdrawal longer than 90 days a reapplication for servicer authority 
to process appraisals under these regulations will be required. Written 
notice will be provided at least 30 days in advance of withdrawal 
unless the Government's interests are exposed to immediate risk from 
the servicer's activities in which case the withdrawal will be effected 
immediately. The notice will clearly and specifically set forth the 
basis and grounds for the action. There is no right to a formal hearing 
to contest the withdrawal of SAPP processing privileges. However, if 
within 15 days after receiving notice the servicer requests an 
opportunity to contest the withdrawal, the servicer may submit, in 
person, in writing, or through a representative, information and 
argument to the Loan Guaranty Officer in opposition to the withdrawal. 
The Loan Guaranty Officer will make a recommendation to the Regional 
Loan Center Director who shall make the determination as to whether the 
action should be sustained, modified or rescinded. The servicer will be 
informed in writing of the decision.
    (2) The servicer has the right to appeal the Regional Loan Center 
Director's decision to the Undersecretary for Benefits. In the event of 
such an appeal, the Undersecretary for Benefits will review all 
relevant material concerning the matter and make a determination that 
shall constitute final agency action. If the servicer's submission of 
opposition raises a genuine dispute over facts material to the 
withdrawal of SAPP authority, the servicer will be afforded an 
opportunity to appear with a representative, submit documentary 
evidence, present witnesses and confront any witness the Veterans 
Benefits Administration presents. The Undersecretary for Benefits will 
appoint a hearing officer or panel to conduct the hearing. When such 
additional proceedings are necessary, the Undersecretary for Benefits 
shall base the determination on the facts as found, together with any 
information and argument submitted by the servicer.
    (3) In actions based upon a conviction or civil judgment, or in 
which there is no genuine dispute over material facts, the 
Undersecretary for Benefits shall make a decision on the basis of all 
the information in the administrative record, including any submission 
made by the servicer.
    (4) Withdrawal of the SAPP authority will require that VA make 
subsequent determinations of reasonable value for the servicer. 
Consequently, VA staff will review each appraisal report and issue a 
Notice of Value which can then be used by the servicer to compute the 
net value of properties for liquidation purposes.
    (5) Withdrawal by VA of the servicer's SAPP authority does not 
prevent VA from also withdrawing automatic processing authority or 
taking debarment or suspension action based upon the same conduct of 
the servicer.

(Authority 38 U.S.C. 3703(c)(1), 3731 and 3732)

(The Office of Management and Budget has approved the information 
collection requirements in this section under control numbers 2900-
0045 and 2900-0513.)


Sec.  36.4849  Waivers, consents, and approvals; when effective.

    No waiver, consent, or approval required or authorized by the 
regulations concerning guaranty or insurance of loans to veterans shall 
be valid unless in writing signed by the Secretary or the subordinate 
officer to whom authority has been delegated by the Secretary.

(Authority 38 U.S.C. 3703(c)(1))


Sec.  36.4850  Servicing procedures for holders.

    (a) Establishment of loan servicing program. The holder of a loan 
guaranteed or insured by the Secretary shall develop and maintain a 
loan servicing program which follows accepted industry standards for 
servicing of similar type conventional loans. The loan servicing 
program established pursuant to this section may employ different 
servicing approaches to fit individual borrower circumstances and avoid 
establishing a fixed routine. However, it must incorporate each of the 
provisions specified in paragraphs (b) through (l) of this section.
    (b) Procedures for providing information. (1) Loan holders shall 
establish procedures to provide loan information to borrowers, arrange 
for individual loan consultations upon request and maintain controls to 
assure prompt responses to inquiries. One or more of the following 
means of making information readily available to borrowers is required.
    (i) An office staffed with trained servicing personnel with access 
to loan account information located within 200 miles of the property.
    (ii) Toll-free telephone service or acceptance of collect telephone 
calls at an office capable of providing needed information.
    (2) All borrowers must be informed of the system available for 
obtaining answers to loan inquiries, the office from which the needed 
information may be obtained, and reminded of the system at least 
annually.
    (c) Statement for income tax purposes. Before February 1st of each 
calendar year, the holder shall furnish to the borrower a statement of 
the interest paid and, if applicable, a

[[Page 6351]]

statement of the taxes disbursed from the escrow account during the 
preceding year. At the borrower's request, the holder shall furnish a 
statement of the escrow account sufficient to enable the borrower to 
reconcile the account.
    (d) Change of servicing. Whenever servicing of a loan guaranteed or 
insured by the Secretary is transferred from one holder to another, 
notice of such transfer by both the transferor and transferee, the form 
and content of such notice, the timing of such notice, the treatment of 
payments during the period of such transfer, and damages and costs for 
failure to comply with these requirements shall be governed by the 
pertinent provisions of the Real Estate Settlement Procedures Act as 
administered by the Department of Housing and Urban Development.
    (e) Escrow accounts. A holder of a loan guaranteed or insured by 
the Secretary may collect periodic deposits from the borrower for taxes 
and/or insurance on the security and maintain a tax and insurance 
escrow account provided such a requirement is authorized under the 
terms of the security instruments. In maintaining such accounts, the 
holder shall comply with the pertinent provisions of the Real Estate 
Settlement Procedures Act.
    (f) System for servicing delinquent loans. In addition to the 
requirements of the Real Estate Settlement Procedures Act, concerning 
the duties of the loan servicer to respond to borrower inquiries, to 
protect the borrower's credit rating during a payment dispute period, 
and to pay damages and costs for noncompliance, holders shall establish 
a system for servicing delinquent loans which ensures that prompt 
action is taken to collect amounts due from borrowers and minimize the 
number of loans in a default status. The holder's servicing system must 
include the following:
    (1) An accounting system which promptly alerts servicing personnel 
when a loan becomes delinquent;
    (2) A collection staff which is trained in techniques of loan 
servicing and counseling delinquent borrowers to advise borrowers how 
to cure delinquencies, protect their equity and credit rating and, if 
the default is insoluble, pursue alternatives to foreclosure;
    (3) Procedural guidelines for individual analysis of each 
delinquency;
    (4) Instructions and appropriate controls for sending delinquent 
notices, assessing late charges, handling partial payments, maintaining 
servicing histories and evaluating repayment proposals;
    (5) Management review procedures for evaluating efforts made to 
collect the delinquency and the response from the borrower before a 
decision is made to initiate action to liquidate a loan;
    (6) Procedures for reporting delinquencies of 90 days or more and 
loan terminations to major consumer credit bureaus as specified by the 
Secretary and for informing borrowers that such action will be taken; 
and
    (7) Controls to ensure that all notices required to be given to the 
Secretary on delinquent loans are provided timely and in such form as 
the Secretary shall require.
    (g) Collection actions. (1) Holders shall employ collection 
techniques which provide flexibility to adapt to the individual needs 
and circumstances of each borrower. A variety of collection techniques 
may be used based on the holder's determination of the most effective 
means of contact with borrowers during various stages of delinquency. 
However, at a minimum the holder's collection procedures must include 
the following actions:
    (i) An effort, concurrent with the initial late payment notice to 
establish contact with the borrower(s) by telephone. When talking with 
the borrower(s), the holder should attempt to determine why payment was 
not made and emphasize the importance of remitting loan installments as 
they come due.
    (ii) A letter to the borrower(s) if payment has not been received 
within 30 days after it is due and telephone contact could not be made. 
This letter should emphasize the seriousness of the delinquency and the 
importance of taking prompt action to resolve the default. It should 
also notify the borrower(s) that the loan is in default, state the 
total amount due and advise the borrower(s) how to contact the holder 
to make arrangements for curing the default.
    (iii) In the event the holder has not established contact with the 
borrower(s) and has not determined the financial circumstances of the 
borrower(s) or established a reason for the default or obtained 
agreement to a repayment plan from the borrower(s), then a face-to-face 
interview with the borrower(s) or a reasonable effort to arrange such a 
meeting is required.
    (iv)(A) A letter to the borrower if payment has not been received:
    (1) In the case of a default occurring within the first 6 months 
following loan closing or the execution of a modification agreement 
pursuant to Sec.  36.4815, within 45 calendar days after such payment 
was due; or
    (2) In the case of any other default, within 75 calendar days after 
such payment was due.
    (B) The letter required by paragraph (g)(1)(iv)(A) must be mailed 
no later than 7 calendar days after the payment is delinquent for the 
time period stated in paragraph (g)(1)(iv)(A) and shall:
    (1) Provide the borrower with a toll-free telephone number and, if 
available, an e-mail address for contacting the servicer;
    (2) Explain loss mitigation options available to the borrower;
    (3) Emphasize that the intent of servicing is to retain home 
ownership whenever possible; and
    (4) Contain the following language:

    The delinquency of your mortgage loan is a serious matter that 
could result in the loss of your home. If you are the veteran whose 
entitlement was used to obtain this loan, you can also lose your 
entitlement to a future VA home loan guaranty. If you are not 
already working with us to resolve the delinquency, please call us 
to discuss your workout options. You may be able to make special 
payment arrangements that will reinstate your loan. You may also 
qualify for a repayment plan or loan modification.
    VA has guaranteed a portion of your loan and wants to ensure 
that you receive every reasonable opportunity to bring your loan 
current and retain your home. VA can also answer any questions you 
have regarding your entitlement. If you have access to the Internet 
and would like to obtain more information, you may access the VA web 
site at www.va.gov. You may also learn where to speak to a VA Loan 
Administration representative by calling 1-800-827-1000.

    (2) The holder must provide a valid explanation of any failure to 
perform these collection actions when reporting loan defaults to the 
Secretary. A pattern of such failure may be a basis for sanctions under 
2 CFR parts 180 and 801.
    (h) Conducting interviews with delinquent borrowers. When personal 
contact with the borrower(s) is established, the holder shall solicit 
sufficient information to properly evaluate the prospects for curing 
the default and whether the granting of forbearance or other relief 
assistance would be appropriate. At a minimum, the holder must make a 
reasonable effort to establish the following:
    (1) The reason for the default and whether the reason is a 
temporary or permanent condition;
    (2) The present income and employment of the borrower(s);
    (3) The current monthly expenses of the borrower(s) including 
household and debt obligations;
    (4) The current mailing address and telephone number of the 
borrower(s); and

[[Page 6352]]

    (5) A realistic and mutually satisfactory arrangement for curing 
the default.
    (i) Property inspections. (1) The holder shall make an inspection 
of the property securing the loan whenever it becomes aware that the 
physical condition of the security may be in jeopardy. Unless a 
repayment agreement is in effect, a property inspection shall also be 
made at the following times:
    (i) Before the 60th day of delinquency or before initiating action 
to liquidate a loan, whichever is earlier; and
    (ii) At least once each month after liquidation proceedings have 
been started unless servicing information shows the property remains 
owner-occupied.
    (2) Whenever a holder obtains information which indicates that the 
property securing the loan is abandoned, it shall make appropriate 
arrangements to protect the property from vandalism and the elements. 
Thereafter, the holder shall schedule inspections at least monthly to 
prevent unnecessary deterioration due to vandalism, or neglect. With 
respect to any loan more than 60 calendar days delinquent, if the 
property is abandoned, this fact must be reported to the Secretary as 
required in Sec.  36.4817(c)(10) and immediate action should be 
initiated by the servicer to terminate the loan once the abandonment 
has been confirmed.
    (j) Collection records. The holder shall maintain individual file 
records of collection action on delinquent loans and make such records 
available to the Secretary for inspection on request. Such collection 
records shall show:
    (1) The dates and content of letters and notices which were mailed 
to the borrower(s);
    (2) Dated summaries of each personal servicing contact and the 
result of same;
    (3) The indicated reason(s) for default; and
    (4) The date and result of each property inspection.
    (k) Quality control procedures. No later than 180 days after the 
effective date of this regulation, each loan holder shall establish 
internal controls to periodically assess the quality of the servicing 
performed on loans guaranteed by the Secretary and assure that all 
requirements of this section are being met. Those procedures must 
provide for a review of the holder's servicing activities at least 
annually and include an evaluation of delinquency and foreclosure rates 
on loans in its portfolio which are guaranteed by the Secretary. As 
part of its evaluation of delinquency and foreclosure rates, the holder 
shall:
    (1) Collect and maintain appropriate data on delinquency and 
foreclosure rates to enable the holder to evaluate effectiveness of its 
collection efforts;
    (2) Determine how its VA delinquency and foreclosure rates compare 
with rates in reports published by the industry, investors and others; 
and,
    (3) Analyze significant variances between its foreclosure and 
delinquency rates and those found in available reports and publications 
and take appropriate corrective action.
    (l) Provision of Data. Holders shall provide available statistical 
data on delinquency and foreclosure rates and their analysis of such 
data to the Secretary upon request.

(Authority 38 U.S.C. 3703(c)(1))

(The Office of Management and Budget has approved the information 
collection requirements in this section under Control Number 2900-
0530.)


Sec.  36.4851  Minimum property and construction requirements.

    No loan for the purchase or construction of residential property 
shall be eligible for guaranty or insurance unless such property 
complies or conforms with those standards of planning, construction, 
and general acceptability that may be applicable thereto and prescribed 
by the Secretary pursuant to 38 U.S.C. 3704(a).

(Authority 38 U.S.C. 3703(c)(1))


Sec.  36.4852  Authority to close loans on the automatic basis.

    (a) Supervised lender authority. Supervised lenders of the classes 
described in 38 U.S.C. 3702(d)(1) and (2) are authorized by statute to 
process VA guaranteed home loans on the automatic basis. This category 
of lenders includes any Federal land bank, national bank, State bank, 
private bank, building and loan association, insurance company, credit 
union or mortgage and loan company that is subject to examination and 
supervision by an agency of the United States or of any State or by any 
State.
    (b) Non-supervised lender authority. Non-supervised lenders of the 
class described in 38 U.S.C. 3702(d)(3) must apply to the Secretary for 
authority to process loans on the automatic basis. Each of the minimum 
requirements listed below must be met by applicant lenders.
    (1) Experience. The applicant lender must meet one of the following 
experience requirements:
    (i) The applicant lender must have been actively engaged in 
originating VA loans for at least two years, have a VA Lender ID number 
and have originated and closed a minimum of ten VA loans within the 
past two years, excluding interest rate reduction refinance loans 
(IRRRLs), that have been properly documented and submitted in 
compliance with VA requirements and procedures; or
    (ii) The applicant lender must have a VA ID number and, if active 
for less than two years, have originated and closed at least 25 VA 
loans, excluding IRRRLs, that have been properly documented and 
submitted in compliance with VA requirements and procedures; or
    (iii) Each principal officer of the applicant lender, who is 
actively involved in managing origination functions, must have a 
minimum of two recent years' management experience in the origination 
of VA loans. This experience may be with the current or prior employer. 
For the purposes of this requirement, principal officer is defined as 
president or vice president; or
    (iv) If the applicant lender has been operating as an agent for a 
non-supervised automatic lender (sponsoring lender), the firm must 
submit documentation confirming that it has a VA Lender ID number and 
has originated a minimum of ten VA loans, excluding IRRRLs, over the 
past two years. If active for less than two years, the agent must have 
originated at least 25 VA loans. The required documentation is a copy 
of the VA letter approving the applicant lender as an agent for the 
sponsoring lender; a copy of the corporate resolution, describing the 
functions the agent was to perform, submitted to VA by the sponsoring 
lender; and a letter from a senior officer of the sponsoring lender 
indicating the number of VA loans submitted by the agent each year and 
that the loans have been properly documented and submitted in 
compliance with VA requirements and procedures.
    (2) Underwriter. A senior officer of the applicant lender must 
nominate a full-time qualified employee(s) to act in the applicant 
lender's behalf as underwriter(s) to personally review and make 
underwriting decisions on VA loans to be closed on the automatic basis.
    (i) Nominees for underwriter must have a minimum of three years 
experience in processing, pre-underwriting or underwriting mortgage 
loans. At least one recent year of this experience must have included 
making underwriting decisions on VA loans. (Recent is defined as within 
the past three years.) A VA nomination and current resume, outlining 
the underwriter's specific experience with

[[Page 6353]]

VA loans, must be submitted for each underwriter nominee.
    (ii) Alternatively, if an underwriter does not have the experience 
outlined above, the underwriter must submit documentation verifying 
that he or she is a current Accredited Residential Underwriter (ARU) as 
designated by the Mortgage Bankers Association (MBA).
    (iii) If an underwriter is not located in the lender's corporate 
office, then a senior officer must certify that the underwriter reports 
to and is supervised by an individual who is not a branch manager or 
other person with production responsibilities.
    (iv) All VA-approved underwriters must attend a 1-day (eight-hour) 
training course on underwriter responsibilities, VA underwriting 
requirements, and VA administrative requirements, including the usage 
of VA forms, within 90 days of approval (if VA is unable to make such 
training available within 90 days, the underwriter must attend the 
first available training). Immediately upon approval of a VA 
underwriter, the office of jurisdiction will contact the underwriter to 
schedule this training at a VA regional office (VARO) of the 
underwriter's choice. This training is required for all newly approved 
VA underwriters, including those who qualified for approval based on an 
ARU designation, as well as VA-approved underwriters who have not 
underwritten VA-guaranteed loans in the past 24 months. Furthermore, 
and at the discretion of any VARO in whose jurisdiction the lender is 
originating VA loans, VA-approved underwriters who consistently approve 
loans that do not meet VA credit standards may be required to retake 
this training.
    (3) Underwriter Certification. The lender must certify that all 
underwriting decisions as to whether to accept or reject a VA loan will 
be made by a VA-approved underwriter. In addition each VA-approved 
underwriter will be required to certify on each VA loan that he or she 
approves that the loan has been personally reviewed and approved by the 
underwriter.
    (4) Financial Requirements. Each application must include the most 
recent annual financial statement audited and certified by a certified 
public accountant (CPA). If the date of the annual financial statement 
precedes that of the application by more than six months, the lender 
must also attach a copy of its latest internal financial statement. 
Lenders are required to meet either the working capital or the minimum 
net worth financial requirement as defined below.
    (i) Working Capital. A minimum of $50,000 in working capital must 
be demonstrated.
    (A) Working capital is a measure of an applicant lender's 
liquidity, or the ability to pay its short-term debts. Working capital 
is defined as the excess of current assets over current liabilities. 
Current assets are defined as cash or other liquid assets convertible 
into cash within a 1-year period. Current liabilities are defined as 
debts that must be paid within the same 1-year time frame.
    (B) The VA determination of whether a lender has the required 
minimum working capital is based on the balance sheet of the lender's 
annual audited financial statement. Therefore, either the balance sheet 
must be classified to distinguish between current and fixed assets and 
between current and long-term liabilities or the information must be 
provided in a footnote to the statement.
    (ii) Net Worth. Lenders must show evidence of a minimum of $ 
250,000 in adjusted net worth. Net worth is a measure of an applicant 
lender's solvency, or its ability to exist in the long run, quantified 
by the payment of long-term debts. Net worth as defined by generally 
accepted accounting principles (GAAP) is total assets minus total 
liabilities. Adjusted net worth for VA purposes is the same as the 
adjusted net worth required by the Department of Housing and Urban 
Development (HUD), net worth less certain unacceptable assets 
including:
    (A) Any assets of the lender pledged to secure obligations of 
another person or entity.
    (B) Any asset due from either officers or stockholders of the 
lender or related entities, in which the lender's officers or 
stockholders have a personal interest, unrelated to their position as 
an officer or stockholder.
    (C) Any investment in related entities in which the lender's 
officers or stockholders have a personal interest unrelated to their 
position as an officer or stockholder.
    (D) That portion of an investment in joint ventures, subsidiaries, 
affiliates and/or other related entities which is carried at a value 
greater than equity, as adjusted. ``Equity as adjusted'' means the book 
value of the related entity reduced by the amount of unacceptable 
assets carried by the related entity.
    (E) All intangibles, such as goodwill, covenants not to compete, 
franchisee fees, organization costs, etc., except unamortized servicing 
costs carried at a value established by an arm's-length transaction and 
presented in accordance with generally accepted accounting principles.
    (F) That portion of an asset not readily marketable and for which 
appraised values are very subjective, carried at a value in excess of a 
substantially discounted appraised value. Assets such as antiques, art 
work and gemstones are subject to this provision and should be carried 
at the lower of cost or market.
    (G) Any asset that is principally used for the personal enjoyment 
of an officer or stockholder and not for normal business purposes. 
Adjusted net worth must be calculated by a CPA using an audited and 
certified balance sheet from the lender's latest financial statements. 
``Personal interest'' as used in this section indicates a relationship 
between the lender and a person or entity in which that specified 
person (e.g., spouse, parent, grandparent, child, brother, sister, 
aunt, uncle or in-law) has a financial interest in or is employed in a 
management position by the lender.
    (5) Lines of credit. The lender applicant must have one or more 
lines of credit aggregating at least $ 1 million. The identity of the 
source(s) of warehouse lines of credit must be submitted to VA and the 
applicant must agree that VA may contact the named source(s) for the 
purpose of verifying the information. A line of credit must be 
unrestricted, that is, funds are available upon demand to close loans 
and are not dependent on prior investor approval. A letter from the 
company(ies) verifying the unrestricted line(s) of credit must be 
submitted with the application for automatic authority.
    (6) Permanent investors. If the lender customarily sells loans it 
originates, it must have a minimum of two permanent investors. The 
names, addresses and telephone numbers of the permanent investors must 
be submitted with the application.
    (7) Liaison. The lender applicant must designate an employee and an 
alternate to be the primary liaison with VA. The liaison officers 
should be thoroughly familiar with the lender's entire operation and be 
able to respond to any query from VA concerning a particular VA loan or 
the firm's automatic authority.
    (8) Other considerations. All applications will also be reviewed in 
light of the following considerations:
    (i) There must be no factors that indicate that the firm would not 
exercise the care and diligence required of a lender originating and 
closing VA loans on the automatic basis; and
    (ii) In the event the applicant lender, any member of the board of 
directors, or any principal officer has ever been debarred or suspended 
by any Federal

[[Page 6354]]

agency or department, or any of its directors or officers has been a 
director or officer of any other lender or corporation that was so 
debarred or suspended, or if the lender applicant ever had a servicing 
contract with an investor terminated for cause, a statement of the 
facts must be submitted with the application for automatic authority.
    (9) Quality Control System. In order to be approved as a non-
supervised lender for automatic-processing authority, the lender must 
implement a written quality control system which ensures compliance 
with VA requirements. The lender must agree to furnish findings under 
its systems to VA on demand. The elements of the quality control system 
must include the following:
    (i) Underwriting policies. Each office of the lender shall maintain 
copies of VA credit standards and all available VA underwriting 
guidelines.
    (ii) Corrective measures. The system should ensure that effective 
corrective measures are taken promptly when deficiencies in loan 
originations are identified by either the lender or VA. Any cases 
involving major discrepancies which are discovered under the system 
must be reported to VA.
    (iii) System integrity. The quality control system should be 
independent of the mortgage loan production function.
    (iv) Scope. The review of underwriting decisions and certifications 
must include compliance with VA underwriting requirements, sufficiency 
of documentation and soundness of underwriting judgments.
    (v) Appraisal quality. For lenders approved for the Lender 
Appraisal Processing Program (LAPP), the quality control system must 
specifically contain provisions concerning the adequacy and quality of 
real property appraisals. While the lender's quality control personnel 
need not be appraisers, they should have basic familiarity with 
appraisal theory and techniques so that they can select appropriate 
cases for review if discretionary sampling is used, and prescribe 
appropriate corrective action(s) in the appraisal review process when 
discrepancies or problems are identified. Copies of the lender's 
quality control plan or self-policing system evidencing appraisal 
related matters must be provided to the VA office of jurisdiction.
    (10) Courtesy closing. The lender applicant must certify to VA that 
it will not close loans on an automatic basis as a courtesy or 
accommodation for other mortgage lenders, whether or not such lenders 
are themselves approved to close on an automatic basis without the 
express approval of VA. However, a lender with automatic authority may 
close loans for which information and supporting credit data have been 
developed on its behalf by a duly authorized agent.
    (11) Probation. Lenders meeting these requirements will be approved 
to close VA loans on an automatic basis for a 1-year period. At the end 
of this period, the lender's quality of underwriting, the completeness 
of loan submissions, compliance with VA requirements and procedures, 
and the delinquency and foreclosure rates will be reviewed.
    (12) Extensions of Automatic Authority. When a lender wants its 
automatic authority extended to another State, the request must be 
submitted, with the fee designated in paragraph (e)(5) of this section, 
to the VA regional office having jurisdiction in the State where the 
lender's corporate office is located.
    (i) When a lender wants its automatic authority to include loans 
involving a real estate brokerage and/or a residential builder or 
developer in which it has a financial interest, owns, is owned by, or 
with which it is affiliated, the following documentation must be 
submitted:
    (A) A corporate resolution from the lender and each affiliate 
indicating that they are separate entities operating independently of 
each other. The lender's corporate resolution must indicate that it 
will not give more favorable underwriting consideration to its 
affiliate's loans, and the affiliate's corporate resolution must 
indicate that it will not seek to influence the lender to give their 
loans more favorable underwriting consideration.
    (B) Letters from permanent investors indicating the percentage of 
all VA loans based on the affiliate's production originated by the 
lender over a 1-year period that are past due 90 days or more. This 
delinquency ratio must be no higher than the national average for the 
same period for all mortgage loans.
    (ii) When a lender wants its automatic authority extended to 
additional States, the lender must indicate how it plans to originate 
VA loans in those States. Unless a lender proposes a telemarketing 
plan, VA requires that a lender have a presence in the State, that is, 
a branch office, an agent relationship, or that it is a reasonable 
distance from one of its offices in an adjacent State, i.e., 50 miles. 
If the request is based on an agency relationship, the documentation 
outlined in paragraph (b)(13) must be submitted with the request for 
extension.
    (13) Use of Agents. A lender using an agent to perform a portion of 
the work involved in originating and closing a VA-guaranteed loan on an 
automatic basis must take full responsibility by certification for all 
acts, errors and omissions of the agent or other entity and its 
employees for the work performed. Any such acts, errors or omissions 
will be treated as those of the lender and appropriate sanctions may be 
imposed against the lender and its agent. Lenders requesting an agent 
must submit the following documentation to the VA regional office 
having jurisdiction for the lender's corporate office:
    (i) A corporate resolution certifying that the lender takes full 
responsibility for all acts, errors and omissions of the agent that it 
is requesting. The corporate resolution must also identify the agent's 
name and address, and the geographic area in which the agent will be 
originating and/or closing VA loans; whether the agent is authorized to 
issue interest rate lock-in agreements on behalf of the lender; and 
outline the functions the agent is to perform. Alternatively, the 
lender may submit a blanket corporate resolution which sets forth the 
functions of any and all agents and identifies individual agents by 
name, address, and geographic area in separate letters which refer to 
the blanket resolution.
    (ii) When the VA regional office having jurisdiction for the 
lender's corporate office acknowledges receipt of the lender's request 
in writing, the agent is thereby authorized to originate VA loans on 
the lender's behalf.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (c) Reporting responsibility. A lender approved to close loans on 
the automatic basis who subsequently fails to meet the requirements of 
this section must report to VA the circumstances surrounding the 
deficiency and the remedial action to be taken to cure it. Failure to 
advise VA in a timely manner could result in a lender's loss of its 
approval to close VA loans on the automatic basis.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (d) Annual recertification. Non-supervised lenders of the class 
described in 38 U.S.C. 3702(d)(3) must be recertified annually for 
authority to process loans on the automatic basis. The following 
minimum annual recertification requirements must be met by each lender 
approved for automatic authority:
    (1) Financial requirements. A lender must submit, within 120 days 
following the end of its fiscal year, an audited and certified 
financial statement with a classified balance sheet or a separate

[[Page 6355]]

footnote for adjusted net worth to VA Central Office (264) for review. 
The same minimum financial requirements described in Sec.  
36.4852(b)(5) must be maintained and verified annually in order to be 
recertified for automatic authority.
    (2) Processing annual lender data. The VA regional office having 
jurisdiction for the lender's corporate office will mail an annual 
notice to the lender requesting current information on the lender's 
personnel and operation. The lender is required to complete the form 
and return it with the appropriate annual renewal fees to the VA 
regional office.

(Authority: 38 U.S.C. 501(a), 3702(d))

    (e) Lender fees. To participate as a VA automatic lender, non-
supervised lenders of the class described in 38 U.S.C. 3702(d)(3) shall 
pay fees as follows:
    (1) $500 for new applications;
    (2) $200 for reinstatement of lapsed or terminated automatic 
authority;
    (3) $100 for each underwriter approval;
    (4) $100 for each agent approval;
    (5) A minimum fee of $100 for any other VA administrative action 
pertaining to a lender's status as an automatic lender;
    (6) $200 annually for certification of home offices; and
    (7) $100 annually for each agent renewal.
    (f) Supervised lender fees. Supervised lenders of the classes 
described in paragraphs (d)(1) and (d)(2) of 38 U.S. Code 3702 
participating in VA's Loan Guaranty Program shall pay fees as follows:
    (1) $100 fee for each agent approval; and
    (2) $100 annually for each agent renewal.

(Authority: 38 U.S.C. 501(a) and 3703(c)(1))

    (g) LAPP fees. Lenders participating in VA's Lender Appraisal 
Processing Program shall pay a fee of $100 for approval of each staff 
appraisal reviewer.

(Authority 38 U.S.C. 3703(c)(1))


Sec.  36.4853  Withdrawal of authority to close loans on the automatic 
basis.

    (a)(1) As provided in 38 U.S.C. 3702(e), the authority of any 
lender to close loans on the automatic basis may be withdrawn by the 
Secretary at any time upon 30 days notice. The automatic processing 
authority of both supervised and non-supervised lenders may be 
withdrawn for engaging in practices which are imprudent from a lending 
standpoint or which are prejudicial to the interests of veterans or the 
Government but are of a lesser degree than would warrant complete 
suspension or debarment of the lender from participation in the 
program.
    (2) Automatic-processing authority may be withdrawn at any time for 
failure to meet basic qualifying and/or annual recertification 
criteria.
    (i) Non-supervised lenders. (A) Automatic authority may be 
withdrawn for lack of a VA-approved underwriter, failure to maintain 
$50,000 in working capital or $250,000 in adjusted net worth, or 
failure to file required financial information.
    (B) During the 1-year probationary period for newly approved 
lenders, automatic authority may be temporarily or permanently 
withdrawn for any of the reasons set forth in this section regardless 
of whether deficiencies previously have been brought to the attention 
of the probationary lender.
    (ii) Supervised lenders. Automatic authority will be withdrawn for 
loss of status as an entity subject to examination and supervision by a 
Federal or State supervisory agency as required by 38 U.S.C. 3702(d).

(Authority: 38 U.S.C. 3702(d))

    (3) Automatic processing authority may also be withdrawn for any of 
the causes for debarment set forth in 2 CFR parts 180 and 801.
    (b) Authority to close loans on the automatic basis may also be 
temporarily withdrawn for a period of time under the following 
schedule.
    (1) Withdrawal for 60 days may occur when:
    (i) Automatic loan submissions show deficiencies in credit 
underwriting, such as use of unstable sources of income to qualify the 
borrower, ignoring significant adverse credit items affecting the 
applicant's creditworthiness, etc., after such deficiencies have been 
repeatedly called to the lender's attention;
    (ii) Employment or deposit verifications are handcarried by 
applicants or otherwise improperly permitted to pass through the hands 
of a third party;
    (iii) Automatic loan submissions are consistently incomplete after 
such deficiencies have been repeatedly called to the lender's attention 
by VA; or
    (iv) There are continued instances of disregard of VA requirements 
after they have been called to the lender's attention.
    (2) Withdrawal for 180 days may occur when:
    (i) Loans are closed automatically which conflict with VA credit 
standards and which would not have been made by a lender acting 
prudently;
    (ii) The lender fails to disclose to VA significant obligations or 
other information so material to the veteran's ability to repay the 
loan that undue risk to the Government results;
    (iii) Employment or deposit verifications are allowed to be 
handcarried by applicant or otherwise mishandled, resulting in the 
submission of significant misinformation to VA;
    (iv) Substantiated complaints are received that the lender 
misrepresented VA requirements to veterans to the detriment of their 
interests (e.g., veteran was dissuaded from seeking a lower interest 
rate based on lender's incorrect advice that such options were 
precluded by VA requirements);
    (v) Closing documentation shows instances of improper charges to 
the veteran after the impropriety of such charges has been called to 
the lender's attention by VA, or refusal to refund such charges after 
notification by VA; or
    (vi) There are other instances of lender actions which are 
prejudicial to the interests of veterans such as deliberate delays in 
scheduling loan closings.
    (3) Withdrawal for a period of from one year to three years may 
occur when:
    (i) The lender fails to properly disburse loans (e.g., loan 
disbursement checks returned due to insufficient funds);
    (ii) There is involvement by the lender in the improper use of a 
veteran's entitlement (e.g., knowingly permitting the veteran to 
violate occupancy requirements, lender involvement in sale of veteran's 
entitlement, etc.).
    (4) A continuation of actions that have led to previous withdrawal 
of automatic authority justifies withdrawal of automatic authority for 
the next longer period of time.
    (5) Withdrawal of automatic processing authority does not prevent a 
lender from processing VA guaranteed loans on the prior approval basis.
    (6) Action by VA to remove a lender's automatic authority does not 
prevent VA from also taking debarment or suspension action based on the 
same conduct by the lender.
    (7) VA field facilities are authorized to withdraw automatic 
privileges for 60 days, based on any of the violations set forth in 
paragraphs (b)(1) through (b)(3) of this section, for non-supervised 
lenders without operations in other stations' jurisdictions. All 
determinations regarding withdrawal of automatic authority for longer 
periods of time or multi-jurisdictional lenders must be made in Central 
Office.
    (c) VA will provide 30 days notice of a withdrawal of automatic 
authority in order to enable the lender to either close

[[Page 6356]]

or obtain prior approval for a loan on which processing has begun. 
There is no right to a formal hearing to contest the withdrawal of 
automatic processing privileges. However, if within 15 days after 
receiving notice the lender requests an opportunity to contest the 
withdrawal, the lender may submit in person, in writing, or through a 
representative, information and argument in opposition to the 
withdrawal.
    (d) If the lender's submission in opposition raises a dispute over 
facts material to the withdrawal of automatic authority, the lender 
will be afforded an opportunity to appear with a representative, submit 
documentary evidence, present witnesses, and confront any witnesses VA 
presents. The Under Secretary for Benefits will appoint a hearing 
officer or panel to conduct the hearing.
    (e) A transcribed record of the proceedings shall be made available 
at cost to the lender, upon request, unless the requirement for a 
transcript is waived by mutual agreement.
    (f) In actions based upon a conviction or civil judgment, or in 
which there is no genuine dispute over material facts, the Under 
Secretary for Benefits shall make a decision on the basis of all the 
information in the administrative record, including any submission made 
by the lender.
    (g) In actions in which additional proceedings are necessary to 
determine disputed material facts, written findings of fact will be 
prepared by the hearing officer or panel. The Under Secretary for 
Benefits shall base the decision on the facts as found, together with 
any information and argument submitted by the lender and any other 
information in the administrative record.

(Authority: 38 U.S.C. 3703(c)(1))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control numbers 2900-
0574.)


Sec.  36.4854  Estate of veteran in real property.

    (a) The title of the estate in the realty acquired by the veteran, 
wholly or partly with the proceeds of a guaranteed or insured loan, or 
owned by him and on which construction, or repairs, or alterations or 
improvements are to be made, shall be such as is acceptable to informed 
buyers, title companies, and attorneys, generally, in the community in 
which the property is situated, except as modified by paragraph (b) of 
this section. Such estate shall be not less than:
    (1) A fee simple estate therein, legal or equitable; or
    (2) A leasehold estate running or renewable at the option of the 
lessee for a period of not less than 14 years from the maturity of the 
loan, or to any earlier date at which the fee simple title will vest in 
the lessee, which is assignable or transferable, if the same be 
subjected to the lien; however, a leasehold estate which is not freely 
assignable and transferable will be considered an acceptable estate if 
it is determined by the Under Secretary for Benefits, or the Director, 
Loan Guaranty Service:
    (i) That such type of leasehold is customary in the area where the 
property is located,
    (ii) That a veteran or veterans will be prejudiced if the 
requirement for free assignability is adhered to; and
    (iii) That the assignability and other provisions applicable to the 
leasehold estate are sufficient to protect the interests of the veteran 
and the Government and are otherwise acceptable; or
    (3) A life estate, provided that the remainder and reversionary 
interests are subjected to the lien; or
    (4) A beneficial interest in a revocable Family Living Trust that 
ensures that the veteran, or veteran and spouse, have an equitable life 
estate, provided the lien attaches to any remainder interest and the 
trust arrangement is valid under State law.
    (b) Any such property or estate will not fail to comply with the 
requirements of paragraph (a) of this section by reason of the 
following:
    (1) Encroachments;
    (2) Easements;
    (3) Servitudes;
    (4) Reservations for water, timber, or subsurface rights; or
    (5) Sale and lease restrictions:
    (i) Except as to condominiums, the right in any grantor or cotenant 
in the chain of title, or a successor of either, to purchase for cash, 
which right was established by an instrument recorded prior to December 
1, 1976, and by the terms thereof is exercisable only if:
    (A) An owner elects to sell;
    (B) The option price is not less than the price at which the then 
owner is willing to sell to another; and
    (C) Exercised within 30 days after notice is mailed by registered 
mail to the address of optionee last known to the then owner of the 
then owner's election to sell, stating the price and the identity of 
the proposed vendee;
    (ii) A condominium estate established by the filing for record of 
the Master Deed, or other enabling document before December 1, 1976 
will not fail to comply with the requirements of paragraph (a) of this 
section by reason of:
    (A) Prohibition against leasing a unit for a period of less than 6 
months.
    (B) The existence of a right of first option to purchase or right 
to provide a substitute buyer reserved to the condominium association 
provided such option or right is exercisable only if:
    (1) An owner elects to sell;
    (2) The option price is not less than the price at which the then 
owner is willing to sell to another;
    (3) The terms and conditions under which the option price is to be 
paid are identical to or are not less favorable to the owner than the 
terms and conditions under which the owner was willing to sell to the 
owner's prospective buyer; and
    (4) Notice of the association's decision to exercise the option 
must be mailed to the owner by registered or certified mail within 30 
days after notice is mailed by registered or certified mail to the 
address of the association last known to the owner of the owner's 
election to sell, stating the price, terms of sale, and the identity of 
the proposed vendee.
    (iii) Any property subject to a restriction on the owner's right to 
convey to any party of the owner's choice, which restriction is 
established by a document recorded on or after December 1, 1976, will 
not qualify as security for a guaranteed or insured loan. A prohibition 
or restriction on leasing an individual unit in a condominium will not 
cause the condominium estate to fail to qualify as security for such 
loan, provided the restriction is in accordance with Sec.  36.4862(c).
    (iv) Notwithstanding the provisions of paragraphs (b)(5)(i), (ii), 
and (iii) of this section, a property shall not be considered 
ineligible pursuant to paragraph (a) of this section if:
    (A) The veteran obtained the property under a State or local 
political subdivision program designed to assist low-or moderate-income 
purchasers, and as a condition the purchaser must agree to one or more 
of the following restrictions:
    (1) If the property is resold within a time period as established 
by local law or ordinance, after the purchaser acquires title, the 
purchaser must first offer the property to the government housing 
agency, or a low-or moderate-income purchaser designated by such 
agency, provided the option to purchase is exercised within 90 days 
after notice by the purchaser to the agency of intention to sell.
    (2) If the property is resold within a time period as established 
by local law or ordinance after the purchaser acquires title, a 
governmental agency

[[Page 6357]]

may specify a maximum price which the veteran may receive for the 
property upon resale; or
    (3) Such other restriction approved by the Secretary designed to 
insure either that a property acquired under such program again be made 
available to low-or moderate-income purchasers, or to prevent a private 
purchaser from obtaining a windfall profit on the resale of such 
property, while assuring that the purchaser has a reasonable 
opportunity to dispose of the property without undue difficulty at a 
reasonable price.
    (4) The sale price of a property under any of the restrictions of 
paragraph (b)(5)(iv)(A) of this section shall not be less than the 
lowest of the following: The price designated by the owner as the 
asking price; the appraised value of the property; or the original 
purchase price of the property, increased by a factor reflecting all or 
a reasonable portion of the increased costs of housing or the 
percentage increase in median income in the area between the date of 
original purchase and resale, plus the reasonable value or actual costs 
of any capital improvements made by the owner plus a reasonable real 
estate commission less the cost of necessary repairs required to place 
the property in saleable condition; or other reasonable formula 
approved by the Secretary. The veteran must be fully informed and 
consent in writing to the housing restrictions. A copy of the veteran's 
consent statement must be forwarded with the application for home loan 
guaranty or the report of a home loan processed on the automatic basis.

(Authority: 38 U.S.C. 3703(c))

    (B) A recorded restriction on title designed to provide housing for 
older persons, provided that the restriction is acceptable under the 
provisions of the Fair Housing Act, title VIII of the Civil Rights Act 
of 1968, as amended by the Fair Housing Amendments Act of 1988, 42 
U.S.C. 3601 et seq. The veteran must be fully informed and consent in 
writing to the restrictions. A copy of the veteran's consent statement 
must be forwarded with the application for home loan guaranty or the 
report of a home loan processed on the automatic basis.

(Authority: 38 U.S.C. 501, 3703(c)(1))

    (6) Building and use restrictions whether or not enforceable by a 
reverter clause if there has been no breach of the conditions affording 
a right to an exercise of the reverter;
    (7) Any other covenant, condition, restriction, or limitation 
approved by the Secretary in the particular case. Such approval shall 
be a condition precedent to the guaranty or insurance of the loan; 
Provided, That the limitations on the quantum or quality of the estate 
or property that are indicated in this paragraph, insofar as they may 
materially affect the value of the property for the purpose for which 
it is used, are taken into account in the appraisal of reasonable value 
required by 38 U.S.C. chapter 37.
    (c) The following limitations on the quantum or quality of the 
estate or property shall be deemed for the purposes of paragraph (b) of 
this section to have been taken into account in the appraisal of 
residential property and determined by the Secretary as not materially 
affecting the reasonable value of such property:
    (1) Building or use restrictions. Provided:
    (i) No violation exists,
    (ii) The proposed use by a veteran does not presage a violation of 
a condition affording a right of reverter, and
    (iii) Any right of future modification contained in the building or 
use restrictions is not exercisable, by its own terms, until at least 
10 years following the date of the loan.
    (2) Violations of racial and creed restrictions. Violations of a 
restriction based on race, color, creed, or national origin, whether or 
not such restriction provides for reversion or forfeiture of title or a 
lien for liquidated damages in the event of a breach.
    (3) Violations of building or use restrictions of record. 
Violations of building or use restrictions of record which have existed 
for more than 1 year, are not the subject of pending or threatened 
litigation, and which do not provide for a reversion or termination of 
title, or condemnation by municipal authorities, or, a lien for 
liquidated damages which may be superior to the lien of the guaranteed 
or insured mortgage.
    (4) Easements. (i) Easements for public utilities along one or more 
of the property lines and easements for drainage or irrigation ditches, 
provided the exercise of the rights thereof do not interfere with the 
use of any of the buildings or improvements located on the subject 
property.
    (ii) Mutual easements for joint driveways located partly on the 
subject property and partly on adjoining property, provided the 
agreement is recorded in the public records.
    (iii) Easements for underground conduits which are in place and 
which do not extend under any buildings in the subject property.
    (5) Encroachments. (i) On the subject property by improvements on 
the adjoining property where such encroachments do not exceed 1 foot 
within the subject boundaries, provided such encroachments do not touch 
any buildings or interfere with the use or enjoyment of any building or 
improvement on the subject property.
    (ii) By hedges or removable fences belonging to subject or 
adjoining property.
    (iii) Not exceeding 1 foot on adjoining property by driveways 
belonging to subject property, provided there exists a clearance of at 
least 8 feet between the buildings on the subject property and the 
property line affected by the encroachment.
    (6) Variations of lot lines. Variations between the length of the 
subject property lines as shown on the plot plan or other exhibits 
submitted to Department of Veterans Affairs and as shown by the record 
or possession lines, provided such variations do not interfere with the 
current use of any of the improvements on the subject property and do 
not involve a deficiency of more than 2 percent with respect to the 
length of the front line or more than 5 percent with respect to the 
length of any other line.

(Authority: 38 U.S.C. 3703(c))


Sec.  36.4855  Loans, first, second, or unsecured.

    Loans for the purchase of real property or a leasehold estate as 
limited in the regulations concerning guaranty or insurance of loans to 
veterans, or for the alteration, improvement, or repair thereof, and 
for more than $1,500 and more than 40 percent of the reasonable value 
of such property or estate prior thereto shall be secured by a first 
lien on the property or estate. Loans for such alteration, improvement, 
or repairs for more than $1,500 but 40 percent or less of the prior 
reasonable value of the property shall be secured by a lien reasonable 
and customary in the community for the type of alteration, improvement, 
or repair financed. Those for $1,500 or less need not be secured, and 
in lieu of the title examination the lender may accept a statement from 
the borrower that he or she has an interest in the property not less 
than that prescribed in Sec.  36.4854(a).

(Authority 38 U.S.C. 3703(c)(1))


Sec.  36.4856  Tax, special assessment and other liens.

    Tax liens, special assessment liens, and ground rents shall be 
disregarded with respect to any requirement that loans shall be secured 
by a lien of specified dignity. With the prior approval of the 
Secretary, Under Secretary for Benefits, or Director, Loan

[[Page 6358]]

Guaranty Service, liens retained by nongovernmental entities to secure 
assessments or charges for municipal type services and facilities 
clearly within the public purpose doctrine may be disregarded. In 
determining whether a loan for the purchase or construction of a home 
is secured by a first lien the Secretary may also disregard a superior 
lien created by a duly recorded covenant running with the realty in 
favor of a private entity to secure an obligation to such entity for 
the homeowner's share of the costs of the management, operation, or 
maintenance of property, services or programs within and for the 
benefit of the development or community in which the veteran's realty 
is located, if the Secretary determines that the interests of the 
veteran-borrower and of the Government will not be prejudiced by the 
operation of such covenant. In respect to any such superior lien to be 
created after June 6, 1969, the Secretary's determination must have 
been made prior to the recordation of the covenant.

(Authority: 38 U.S.C. 3703(d)(3))


Sec.  36.4857  Combination residential and business property.

    If otherwise eligible, a loan for the purchase or construction of a 
combination of residential property and business property which the 
veteran proposes to occupy in part as a home will be eligible under 38 
U.S.C. 3710, if the property is primarily for residential purposes and 
no more than one business unit is included in the property.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4858  [Reserved]


Sec.  36.4859  Supplemental loans.

    (a) Any loan for the alteration, repair, improvement, extension, 
replacement, or expansion of a home, with respect to which a guaranteed 
or insured obligation of the borrower is currently outstanding, may be 
reported for guaranty or insurance coverage, if such loan is made by 
the holder of the currently outstanding obligation, notwithstanding the 
fact no guaranty entitlement remains available to the borrower; 
Provided, that if no entitlement remains available the maximum amount 
payable on the revised guaranty shall not exceed the amount payable on 
the original guaranty on the date of closing the supplemental loan, and 
the percentage of guaranty shall be based upon the proportion the said 
maximum amount bears to the aggregate indebtedness, or, in the case of 
an insured loan, no additional credit to the holder's insurance account 
may be made: Provided further, that the prior approval of the Secretary 
shall be required if:
    (1) The loan will be made by a lender who is not the holder of the 
currently guaranteed or insured obligation; or
    (2) The loan will be made by a lender not of a class specified in 
38 U.S.C. 3702(d); or
    (3) An obligor liable on the currently outstanding obligation will 
be released from personal liability.
    (b) In any case in which the unpaid balance of the prior loan 
currently outstanding is combined or consolidated with the amount of 
the supplemental loan, the entire aggregate indebtedness shall be 
repayable in full within the maximum maturity currently prescribed by 
statute for the original loan. No supplemental loan for the repair, 
alteration, or improvement of residential property will be eligible for 
guaranty or insurance unless such repair, alteration, or improvement 
substantially protects or improves the basic livability or utility of 
the property involved.
    (c) Such loans shall be secured as required in Sec.  36.4855: 
Provided, that a lien of lesser dignity than therein specified will 
suffice if the lien obtained is immediately junior to the lien of the 
original guaranteed or insured obligation: Provided further, that the 
liens of successive supplemental loans may be of lesser dignity so long 
as they are immediately junior to the lien of the last previous 
guaranteed or insured obligation having a lien of required dignity.
    (d) Upon providing or extending guaranty or insurance coverage in 
respect to any such supplemental loan, the rights of the Secretary to 
the proceeds of the sale of security shall be subordinate to the right 
of the holder to satisfy therefrom the indebtedness outstanding on the 
original and supplemental loans.

(Authority: 38 U.S.C. 3703(c)(1), 3710(b)(6))


Sec.  36.4860  Condominium loans--general.

    (a) Authority--applicability of other loan guaranty regulations, 38 
CFR Part 36. A loan to an eligible veteran to purchase a one-family 
residential unit in a condominium housing development or project shall 
be eligible for guaranty or insurance to the same extent and on the 
same terms as other loans under 38 U.S.C. 3710 provided the loan 
conforms to the provisions of chapter 37, title 38 U.S.C., except for 
sections 3711 (direct loans), and 3727 (structural defects). The loan 
must also conform to the otherwise applicable provisions of the 
regulations concerning the guaranty or insurance of loans to veterans. 
Sections 36.4857, 36.4859, and 36.4869 shall not be applicable.
    (b) Definitions. On and after July 1, 1979, the following 
definitions shall be applicable to each condominium loan entitled to be 
guaranteed or insured, and shall be applicable to such loans previously 
guaranteed or insured to the extent that no legal rights vested 
thereunder are impaired. Whenever used in 38 U.S.C. chapter 37 or this 
subpart, unless the context otherwise requires, the terms defined in 
this paragraph shall have the meaning stated.
    (1) Affiliate of declarant. Affiliate of declarant means any person 
or entity which controls, is controlled by, or is under common control 
with, a declarant.
    (i) A person or entity shall be considered to control a declarant 
if that person or entity is a general partner, officer, director, or 
employee of the declarant who:
    (A) Directly or indirectly or acting in concert with one or more 
persons, or through one or more subsidiaries, owns, controls, or holds 
with power to vote, or holds proxies representing, more than 20 percent 
of the voting shares of the declarant;
    (B) Controls in any manner the election of a majority of the 
directors of the declarant; or
    (C) Has contributed more than 20 percent of the capital of the 
declarant.
    (ii) A person or entity shall be considered to be controlled by a 
declarant if the declarant is a general partner, officer, director, or 
employee of that person or entity who:
    (A) Directly or indirectly or acting in concert with one or more 
persons or through one or more subsidiaries, owns, controls, or holds 
with power to vote, or holds proxies representing, more than 20 percent 
of the voting shares of that person or entity;
    (B) Controls in any manner the election of a majority of the 
directors of that person or entity; or
    (C) Has contributed more than 20 percent of the capital of that 
person or entity.
    (2) Condominium. Unless otherwise provided by State law, a 
condominium is a form of ownership in which the buyer receives title to 
a three dimensional air space containing the individual living unit 
together with an undivided interest or share in the ownership of common 
elements (restatement of Sec.  36.4801, Condominium).
    (3) Conversion condominium. Condominium projects not originally 
built and sold as condominiums but

[[Page 6359]]

subsequently converted to the condominium form of ownership.
    (4) Declarant. Any person who has executed a declaration or an 
amendment to a declaration to add additional real estate to the project 
or any successors or assigns of the declarant who offers to sell or 
sells units in the condominium project and who assumes declarant rights 
in the project including the right to: Add, convert or withdraw real 
estate from the condominium project; maintain sales offices, management 
offices and rental units; exercise easements through the common 
elements for the purpose of making improvements within the condominium; 
or exercise control of the owner's association. Declarant is further 
defined as any sponsor of a project or affiliate of the declarant who 
is acting on behalf of or exercising the rights of the declarant.
    (5) Existing--declarant in control or marketing units. A 
condominium in which all onsite or offsite improvements were completed 
or the conversion was completed prior to appraisal by the Department of 
Veterans Affairs, but the declarant is in control of the owners' 
association and/or is currently marketing units for initial transfer to 
individual unit owners.
    (6) Existing--resale. A condominium in which all onsite or offsite 
improvements were completed, or the conversion was completed prior to 
appraisal by the Department of Veterans Affairs, and the declarant is 
no longer in control of the owners' association and/or marketing units 
for initial transfer to individual unit owners.
    (7) Expandable condominium. A project which may be increased in 
size by the declarant. An expandable condominium is constructed in 
phases (or stages). After each phase is completed and constituted, the 
common estates are merged. Each unit owner, thereby, gains an 
individual interest in all of the facilities of the common estate.
    (8) Foreclosure. Foreclosure shall mean the termination of a lien 
by either judicial or nonjudicial procedures in accordance with local 
law or the voluntary transfer of property by a deed-in-lieu of 
foreclosure or similar procedures.
    (9) High rise condominium. A condominium project which is a multi-
story elevator building.
    (10) Horizontal condominium. A condominium project in which 
generally no part of a living unit extends over or under another living 
unit.
    (11) Low rise condominium. A condominium project in which all or a 
part of a living unit extends over or under another living unit, e.g., 
garden apartment or walk-up project.
    (12) Proposed condominium. A condominium project that is to be 
constructed or is under construction. In the case of a condominium 
conversion, the declarant proposes to convert a building or buildings 
to the condominium form of ownership, or the declarant is in the 
process of converting the building or buildings to the condominium form 
of ownership.
    (13) Series condominium. A number of adjoining but separately 
constituted condominiums. An association of owners is established for 
each project, and each association is responsible for maintenance and 
upkeep of the common elements in its own project. Cross-easements 
between the separate condominiums may be created to permit members of 
the separate condominiums to use the common areas of the other 
condominiums.
    (c) Project approval. Prior to Department of Veterans Affairs 
guaranty of an individual unit loan in a condominium, the legal 
documentation establishing the condominium project or development must 
be approved by the Secretary.

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 3710(a)(6))


Sec.  36.4861  Acceptable ownership arrangements and documentation.

    (a) Types of condominium ownership. The following types of basic 
ownership arrangements are generally acceptable provided they are 
established in compliance with the applicable condominium law of the 
jurisdiction(s) in which the condominium is located:
    (1) Ownership of units by individual owners coupled with an 
undivided interest in all common elements.
    (2) Ownership of units by individual owners coupled with an 
undivided interest in general common elements and specified limited 
common elements.
    (3) Individual ownership of units coupled with an undivided 
interest in the general common elements and/or limited common elements, 
with title to additional property for common use vested in an 
association of unit owners, with mandatory membership by unit owners or 
owners' associations. Any such arrangement must not be precluded by 
applicable State law.

(Authority: 38 U.S.C. 3710(a)(6))

    (b) Estate of unit owner. The legal estate of each unit owner must 
comply with the provisions of Sec.  36.4854. The declaration or 
equivalent document shall allocate an undivided interest in the common 
elements to each unit. Such interest may be allocated equally to each 
unit, may be proportionate to that unit's relative size or value, or 
may be allocated according to any other specified criteria provided 
that the method chosen is equitable and reasonable for that 
condominium.

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 3710(a)(6))

    (c) Condominium documentation--(1) Compliance with applicable law. 
The declaration, bylaws and other enabling documentation shall conform 
to the laws governing the establishment and maintenance of condominium 
regimes within the jurisdiction in which the condominium is located, 
and to all other laws which apply to the condominium.
    (2) Recordation. The declaration and all amendments or 
modifications thereof shall be placed of record in the manner 
prescribed by the appropriate jurisdiction. If recording of plats, 
plans, or bylaws or equivalent documents and all amendments or 
modifications thereof is the prevailing practice or is required by law 
within the jurisdiction where the project is located, then such 
documents shall be placed of record. If the bylaws are not recorded, 
then covenants, restrictions and other matters requiring record notice 
should be contained in the declaration or equivalent document.
    (3) Availability. The owner's association shall be required to make 
available to unit owners, lenders and the holders, insurers and 
guarantors of the first mortgage on any unit, current copies of the 
declaration, bylaws and other rules governing the condominium, and 
other books, records and financial statements of the owners' 
association. The owners' association also shall be required to make 
available to prospective purchasers current copies of the declaration, 
bylaws, other rules governing the condominium, and the most recent 
annual audited financial statement, if such is prepared. ``Available'' 
as used in this paragraph (c)(3) shall at least mean available for 
inspection, upon request, during normal business hours or under other 
reasonable circumstances.
    (4) Amendments to documents after Department of Veterans Affairs 
project approval. While the declarant is in control of the owners' 
association, amendments to the declaration, bylaws or other enabling 
documentation must be approved by the Secretary. The declarant should 
have proposed amendments reviewed prior to recordation. This provision 
does not apply to amendments which annex additional phases to the 
condominium regime in accordance with a general

[[Page 6360]]

plan of development (Sec. Sec.  36.4864(a)(3) and 36.4865(b)(6)).

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))

    (d) Real property descriptions in the declaration--(1) Clarity--
conformity with the law of the jurisdiction. The description of the 
units, common elements, any recreational facilities and other related 
amenities, and any limited common elements shall be clear and in 
conformity with the law of the jurisdiction where the project is 
located. Responsibility for maintenance and repair of all portions of 
the condominium shall be set forth clearly.
    (2) Developmental plan--proposed condominiums. The declaration or 
other legally enforceable and binding document must state in a 
reasonable manner the overall development plan of the condominium, 
including building types, architectural style and the size of the units 
for those phases of the condominium which are required to be built. 
Under the applicable provisions of the declaration or such other 
legally enforceable and binding document, the development of the 
required portion of the condominium must be consistent with the overall 
plan, except that the declarant may reserve the right to change the 
overall plan or decide not to construct planned units or improvements 
to the common elements if the declaration sets forth the conditions 
required to be satisfied prior to the exercise of that right the time 
within which the right may be exercised, and any other limitations and 
criteria that would be necessary or appropriate under the particular 
circumstances. Such conditions, time restraints and other limitations 
must be reasonable in light of the overall plan for the condominium. In 
an expandable project, additional phases which are not required to be 
built may be described in the development plan in very general terms, 
or the declaration may provide that the declarant makes no assurances 
concerning the construction, building types, architectural style and 
size of the units, etc. of these phases. However, the minimum number of 
units to be built should be that which would be adequate to reasonably 
support the common elements. (See Sec.  36.4864(a)(6).)

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0448.)


Sec.  36.4862  Rights and restrictions.

    (a) Declarant's rights and restrictions--(1) Disclosure and 
reasonableness of reserved rights. Any right reserved by the declarant 
must be reasonable and set forth in the declaration.
    (2) Examples of reserved rights of declarant, sponsor, or affiliate 
of declarant which are usually unacceptable. Binding the owners' 
association either directly or indirectly to any of the following 
agreements is not acceptable unless the owners' association shall have 
a right of termination thereof which is exercisable without penalty at 
any time after transfer of control, upon not more than 90 days' notice 
to the other party thereto:
    (i) Any management contract, employment contract or lease of 
recreational or parking areas or facilities.
    (ii) Any contract or lease, including franchises and licenses, to 
which a declarant is a party.
    (iii) The requirements of paragraphs (a)(2)(i) and (ii) of this 
section do not apply to acceptable ground leases.
    (3) Examples of reserved rights which are usually acceptable. The 
following rights in the common elements may usually be reserved by the 
declarant for a reasonable period of time, subject to a concomitant 
obligation to restore:
    (i) Easement over and upon the common elements and upon lands 
appurtenant to the condominium for the purpose of completing 
improvements for which provision is made in the declaration, but only 
if access thereto is otherwise not reasonably available.
    (ii) Easement over and upon the common elements for the purpose of 
making repairs required pursuant to the declaration or contracts of 
sale made with unit purchasers.
    (iii) Right to maintain facilities in the common areas which are 
identified in the declaration and which are reasonably necessary to 
market the units. These may include sales and management offices, model 
units, parking areas, and advertising signs.

(Authority: 38 U.S.C. 3704(c)(1), 3710(a)(6))

    (b) Owners' association's rights and restrictions--(1) Right of 
entry upon units and limited common elements. The owners' association 
shall be granted a right of entry upon unit premises and any limited 
common elements to effect emergency repairs, and a reasonable right of 
entry thereupon to effect other repairs, improvements, replacement or 
maintenance as necessary.
    (2) Power to grant rights and restrictions in common elements. The 
owners' association should be granted other rights, such as the right 
to grant utility easements under, through or over the common elements, 
which are reasonably necessary to the ongoing development and operation 
of the project.
    (3) Responsibility for damage to common elements and units. A 
provision may be made in the declaration or bylaws for allocation of 
responsibility for damages resulting from the exercise of any of the 
above rights.
    (4) Assessments--(i) Levy and collection. The declaration or its 
equivalent shall describe the authority of the owners' association to 
levy and enforce the collection of general and special assessments for 
common expenses and shall describe adequate remedies for failure to pay 
such common expenses. The common expenses assessed against any unit, 
with interest, late charges, costs and a reasonable attorney's fee 
shall be a lien upon such unit in accordance with applicable law. Each 
such assessment, together with interest, late charges, costs, and 
attorney's fee, shall also be the personal obligation of the person who 
was the owner of such unit at the time the assessment fell due. The 
personal obligation for delinquent assessments shall not pass to 
successors in title or interest unless assumed by them, or required by 
applicable law. Common expenses as used in this subdivision shall mean 
expenditures made or liabilities incurred by or on behalf of the 
owners' association, together with any assessments for the creation and 
maintenance of reserves.
    (ii) Reserves and working capital. There shall be in new or 
proposed condominium projects (including conversions) a provision for 
an adequate reserve fund for the periodic maintenance, repair and 
replacement of the common elements, which fund shall be maintained out 
of regular assessments for common expenses. Additionally, a working 
capital fund must be established for the initial months of the project 
operations equal to at least a 2 months' estimated common area charge 
for each unit.
    (iii) Priority of lien. Any assessment lien must be subordinate to 
any Department of Veterans Affairs guaranteed mortgage except as 
provided in Sec.  36.4856. A lien for common expense charges and 
assessments shall not be affected by any sale or transfer of a unit 
except that a sale or transfer pursuant to a foreclosure of a first 
mortgage shall extinguish a subordinate lien for common expense charges 
and assessments which became payable prior to such sale or transfer. 
Any such sale or transfer pursuant to a foreclosure shall not relieve 
the purchaser or transferee of a unit from liability for, nor the unit 
so sold or transferred from the

[[Page 6361]]

lien of, any common expense charges thereafter becoming due.

(Authority: 38 U.S.C. 3703(c)(1), (d)(3), 3710(a)(6))

    (c) Unit owners' rights and restrictions--(1) Obligation to pay 
expenses. The declaration or equivalent document shall establish a duty 
on each unit owner, including the declarant, to pay a proportionate 
share of common expenses upon being assessed therefor by the owners' 
association. Such share may be allocated equally to each unit, may be 
proportionate to that unit's common element interest, relative size or 
value, or may be allocated according to any other specified criteria 
provided that the method chosen is equitable and reasonable for that 
condominium.
    (2) Voting rights. The declaration or equivalent document shall 
allocate a portion of the votes in the association to each unit. Such 
portion may be allocated equally to each unit, may be proportionate to 
that unit's common expense liability, common element interest, relative 
size or value, or may be allocated according to any other specified 
criteria provided that the method is equitable and reasonable for that 
condominium. The declaration may provide different criteria for 
allocations of votes to the units on particular specified matters and 
may also provide different percentages of required unit owner approvals 
for such particular specified matters.
    (3) Ingress and egress of unit owners. There may not be any 
restriction upon any unit owner's right of ingress and egress to his or 
her unit.
    (4) Encroachments--(i) Easements for encroachments. In the event 
any portion of the common elements encroaches upon any unit or any unit 
encroaches upon the common elements or another unit as a result of the 
construction, reconstruction, repair, shifting, settlement, or movement 
of any portion of the improvements, a valid easement for the 
encroachment and for the maintenance of the same shall exist so long as 
the encroachment exists. The declaration may provide, however, 
reasonable limits on the extent of any easement created by the overlap 
of units, common elements, and limited common elements resulting from 
such encroachments; or
    (ii) Monuments as boundaries. If permitted by the governing law 
within the jurisdiction where the project is located, the existing 
physical boundaries of a unit or a common element or the physical 
boundaries of a unit or a common element reconstructed in substantial 
accordance with the original plats and plans thereof become its 
boundaries rather than the metes and bounds expressed in the deed, plat 
or plan, regardless of settling or lateral movement of the building, or 
minor variance between boundaries shown on the plats, plans or in the 
deed and those of the building. The declaration should provide 
reasonable limits on the extent of any such revised boundary(ies) 
created by the overlap of units, common elements, and limited common 
elements resulting from such encroachments.
    (5) Right of first refusal. The right of a unit owner to sell, 
transfer, or otherwise convey his or her unit in a condominium shall 
not be subject to any right of first refusal or similar restriction if 
the declaration or similar document is recorded on or after December 1, 
1976. If the declaration was recorded prior to December 1, 1976, the 
right of first refusal must comply with Sec.  36.4854(b)(5)(ii); 
Provided, however, restrictions on the basis of age or restrictions 
established by a State, Territorial, or local government agency as part 
of a program for providing assistance to low- and moderate-income 
purchasers shall be governed by Sec.  36.4854(b)(5)(iv).

(Authority: 38 U.S.C. 3703(c))

    (6) Leasing restrictions. Except as provided in this paragraph, 
there shall be no prohibition or restriction on a condominium unit 
owner's right to lease his or her unit. The following restrictions are 
acceptable:
    (i) A requirement that leases have a minimum initial term of up to 
1 year; or
    (ii) Age restrictions or restrictions imposed by State or local 
housing authorities which are allowable under Sec.  36.4809(e) or Sec.  
36.4854(b)(5)(iv).
    (d) Rights of action. The owners' association and any aggrieved 
unit owner should be granted a right of action against unit owners for 
failure to comply with the provisions of the declaration, bylaws, or 
equivalent documents, or with decisions of the owners' association 
which are made pursuant to authority granted the owners' association in 
such documents. Unit owners should have similar rights of action 
against the owners' association.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))


Sec.  36.4863  Miscellaneous legal requirements.

    (a) Declarant transfer of control of owners' association--(1) 
Standards for transfer of control. The declarant shall relinquish all 
special rights, expressed or implied, through which the declarant may 
directly or indirectly control, direct, modify, or veto any action of 
the owners' association, its executive board, or a majority of unit 
owners, and control of the owners' association shall pass to the owners 
of units within the project, not later than the earlier of the 
following:
    (i) 120 days after the date by which 75 percent of the units have 
been conveyed to unit purchasers,
    (ii) The last date of a specified period of time following the 
first conveyance to a unit purchaser; such period of time is to be 
reasonable for the particular project. The maximum acceptable period 
usually will be from 3 to 5 years for single-phased condominium regimes 
and 5 to 7 years for expandable condominiums, or
    (iii) On a case basis, modifications or variations of the 
requirements of paragraphs (a)(1)(i) and (ii) of this section will be 
acceptable, particularly in circumstances involving very large 
condominium developments.
    (2) Declarant's unit votes after transfer of control. The 
requirements of paragraph (a)(1) of this section shall not affect the 
declarant's rights, as a unit owner, to exercise the votes allocated to 
units which the declarant owns.
    (3) Unit owners' participation in management. Declarant should 
provide for and foster early participation of unit owners in the 
management of the project.
    (b) Taxes. Unless otherwise provided by State law, real estate 
taxes must be assessed and be lienable only against the individual 
units, together with their undivided interests in the common elements, 
and not against the multifamily structure. The owners' association 
usually owns no real estate, so it has no obligation concerning ad 
valorem taxes. Unless taxes are assessed only against the individual 
units, a tax lien could amount to more than the value of any particular 
unit in the structure.
    (c) [Reserved]
    (d) Policies for bylaws. The bylaws of the condominium should be 
sufficiently detailed for the successful governance of the condominium 
by unit owners. Among other things, such documents should contain 
adequate provisions for the election and removal of directors and 
officers.
    (e) Insurance and related requirements--(1) Insurance. The holder 
shall require hazard and flood insurance policies to be procured and 
maintained in accordance with Sec.  36.4829. Because of the nature of 
condominiums, additional types of insurance coverages--such as tort 
liability insurance for injuries sustained on the premises, personal 
liability insurance for directors and officers

[[Page 6362]]

managing association affairs, boiler insurance, etc.--should be 
considered in appropriate circumstances.
    (2) Fidelity bond coverage. The securing of appropriate fidelity 
bond coverage is recommended but not required, for any person or entity 
handling funds of the owners' association, including, but not limited 
to, employees of the professional managers. Such fidelity bonds should 
name the association as an obligee, and be written in an amount equal 
to at least the estimated maximum of funds, including reserve funds, in 
the custody of the owners' association or the management agent at any 
given time during the term of the fidelity bond. However, the bond 
should not be less than a sum equal to 3 months' aggregate assessments 
on all units plus reserve funds.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))


Sec.  36.4864  Documentation and related requirements--flexible 
condominiums and condominiums with offsite facilities.

    (a) Expandable condominiums. The following policies apply to 
condominium regimes which may be increased in size by the declarant:
    (1) The declarant's right to expand the regime must be fully 
described in the declaration. The declaration must contain provisions 
adequate to ensure that future improvements to the condominium will be 
consistent with initial improvements in terms of quality of 
construction. The declarant must build each phase in accordance with an 
approved general plan for the total development (Sec.  36.4861(d)(2)) 
supported by detailed plats and plans of each phase prior to the 
construction of the particular phase.
    (2) The reservation of a right to expand the condominium regime, 
the method of expansion and the result of an expansion must not affect 
the statutory validity of the condominium regime or the validity of 
title to the units.
    (3) The declaration or equivalent document must contain a covenant 
that the condominium regime may not be amended or merged with a 
successor condominium regime without prior written approval of the 
Secretary. The declarant may have the proposed legal documentation to 
accomplish the merger reviewed prior to recordation. However, the 
Secretary's final approval of the merger will not be granted until the 
successor condominium has been legally established and construction 
completed. The declarant may add phases to an expandable condominium 
regime without the prior approval of the Secretary if the phasing 
implements a previously approved general plan for the total 
development. A copy of the amendment to the declaration or other 
annexation document which adds each phase must be submitted to the 
Secretary in accordance with Sec.  36.4865(b)(6).
    (4) Liens arising in connection with the declarant's ownership of, 
and construction of improvements upon, the property to be added must 
not adversely affect the rights of existing unit owners, or the 
priority of first mortgages on units in the existing condominium 
property. All taxes, assessments, mechanic's liens, and other charges 
affecting such property, covering any period prior to the addition of 
the property, must be paid or otherwise satisfactorily provided for by 
the declarant.
    (5) The declarant must purchase (at declarant's own expense) a 
general liability insurance policy in an amount not less than $1 
million for each occurrence, to cover any liability which owners of 
previously sold units are exposed to as a result of further condominium 
project development.
    (6) Each expandable project shall have a specified maximum number 
of units which will give each unit owner a minimum percentage of 
interest in the common elements. Each project shall also have a 
specified minimum number of units which will give each unit owner a 
maximum percentage of interest in the common elements. The minimum 
number of units to be built should be that which would be adequate to 
reasonably support the common elements. The maximum number of units to 
be built should be that which would not overload the capacity of the 
common facilities. The maximum possible percentage(s) and the minimum 
possible percentage(s) of undivided interest in the common elements for 
each type of unit must be stated in the declaration or equivalent 
document.
    (7) The declaration or equivalent document shall set forth clearly 
the basis for reallocation of unit owner's ownership interests, common 
expense liabilities and voting rights in the event the number of units 
in the condominium is increased. Such reallocation shall be according 
to the applicable criteria set forth in Sec. Sec.  36.4861(b) and 
36.4862(c)(1) and (2).
    (8) The declarant's right to expand the condominium must be for a 
reasonable period of time with a specific ending date. The maximum 
acceptable period will usually be from 5 to 7 years after the date of 
recording the declaration. On a case basic, longer periods of expansion 
rights will be acceptable, particularly in circumstances involving 
sizable condominium developments.
    (b) Series projects. (1) Each phase in the series approach is to be 
considered as a separate project. A separate set of legal documents 
must be filed for each phase or project that relates to the condominium 
within its own boundary. The declaration for each phase must describe 
the particular project as a part of the whole development area, but 
subject only the one phase to the condominium regime. A separate unit 
ratio must be established that would relate each unit to all units of 
the particular condominium for purposes of ownership in the common 
areas, voting rights and assessment liability. A separate association 
may be created to govern the affairs of each condominium. Each phase is 
subject to a separate presale requirement.
    (2) In the case of proposed projects, or projects under 
construction, the declaration should state the number of total units 
that the developer intends to build on other sections of the 
development area.
    (c) Other flexible condominiums. Condominiums containing 
withdrawable real estate (contractable condominiums) and condominiums 
containing convertible real estate (portions of the condominium within 
which additional units or limited common elements, or both, may be 
created) will be considered acceptable provided the flexible 
condominium complies with the Sec.  36.4800 series.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))

(The Office of Management and Budget has approved the information 
collection requirements of this section under control number 2900-
0448.)


Sec.  36.4865  Appraisal requirements.

    (a) Existing resale condominiums. Upon acceptance by the local 
office of the organizational documents, the project and unit(s) 
proposed as security for guaranteed financing shall be appraised to 
ensure that they meet MPRs (Minimum Property Requirements) and are 
safe, sanitary, and structurally sound. The Department of Veterans 
Affairs MPRs for existing construction apply to all existing resale 
condominiums including conversions, except that water, heating, 
ventilating, air conditioning and sewer service may be supplied from a 
central source.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6), (b)(5))
    (b) Proposed condominiums or existing condominiums with declarant 
in control or marketing units--(1) Low rise and high rise condominiums. 
Low rise and high rise condominiums shall comply with local building 
codes. Only the alterations, improvements, or repairs to low rise and 
high rise buildings

[[Page 6363]]

proposed to be converted to the condominium form of ownership must 
comply with current local building codes, unless local authorities 
require total code compliance on the entire structure when a building 
is being converted to the condominium form of ownership. In those areas 
where local standards are nonexistent, inferior to, or in conflict with 
Department of Veterans Affairs objectives, a certification will be 
required from a registered professional architect and/or registered 
engineer certifying that the plans and specifications conform to one of 
the national building codes which is typical of similar construction 
methods and standards for condominiums used in the area. Those portions 
of the condominium conversion which are not being altered, improved or 
repaired must be appraised in accordance with paragraph (a) of this 
section.
    (2) Horizontal condominiums. Department of Veterans Affairs 
policies and procedures applicable to single-family residential 
construction shall also apply to horizontal condominiums. Proposed or 
existing (declarant in control or marketing units) horizontal 
condominium conversions shall comply with current local building codes 
for alterations and improvements or repairs made to convert the 
building to the condominium form of ownership unless local authorities 
require total code compliance on the entire structure when a building 
is being converted to the condominium form of ownership. In those areas 
where local standards are nonexistent, inferior to, or in conflict with 
Department of Veterans Affairs objectives, a certification will be 
required from a professional architect and/or registered engineer 
certifying that the plans and specifications conform to one of the 
national building codes which is typical of similar construction 
methods and standards for condominiums used in the area. Those portions 
of the condominium conversion which are not being altered, improved or 
repaired must be appraised in accordance with paragraph (a) of this 
section.

(Authority: 38 U.S.C. 3703(c)(1))

    (3) Unit completion. All units in the individual project or phase 
must be substantially completed except for customer preference items, 
such as interior finishes, appliances or equipment.
    (4) Common element completion. All amenities of the condominium (to 
include offsite community facilities), that are to be considered in the 
unit value, must be bound legally to the condominium regime. All such 
amenities as well as the common elements of the project, must be 
substantially completed and available for use by the unit owners. In 
large multi-phase projects, the declarant should construct common 
elements in a manner consistent with the addition of units to support 
the entire development. The Secretary, in appropriate cases, may 
approve the placement of adequate funds by the declarant in an escrow 
or otherwise earmarked account or accept a letter of credit or surety 
bond to assure completion of amenities and allow closing of VA-
guaranteed (or insured) loans. Such funds must be adequate to assure 
completion of the amenities free and clear of all liens.

(Authority: 38 U.S.C. 3703(c)(1), 3710(a)(6))

    (5) Information brochure/public offering statement. When units are 
being sold by the declarant (not applicable to resales), an information 
brochure/public offering statement must be given to veteran buyers 
prior to the time a down payment is received and an agreement is 
signed, unless State law authorized receipt of the down payment and 
delivery of the information brochure followed by a period in which 
purchasers may cancel the purchase agreement without penalty for a 
specified number of days. Information brochures must be written in 
simple terms to inform buyers that the association does not provide 
owner's contents and personal liability policies which are the owner's 
responsibility. In the event the development is expandable, series, 
etc., there must be full disclosure of the impact of the total 
development plan. In expandable, series or other projects with more 
than one phase, the information brochure must disclose fully later 
development rights, and the general plans of the declarant for 
additional phases. If the declarant makes no assurance concerning 
phases which are not required to be built, the declarant should state 
that no assurances are given concerning construction, unit sizes, 
building types, architectural styles, etc. In condominium conversions, 
the information brochure must list the major structural and mechanical 
components and the estimated remaining useful life of the components. A 
brief explanation must be furnished in the brochure explaining that 
certain major structural or mechanical components may require 
replacement within a specified time period. If the declarant has 
elected to place funds into a condominium reserve fund for replacement 
of a major component under the provisions of Sec.  36.4865(b)(7), the 
amount of the contribution into the reserve fund must be specified in 
the information brochure.
    (6) Evidence of proper phasing. In an expandable or flexible 
condominium, evidence of the addition of each phase in accordance with 
a previously approved general plan of development must be submitted to 
the Secretary prior to the guaranty of the first loan in the added 
area.
    (7) Additional condominium conversion requirements. (i) The 
declarant of any condominium project must furnish structural and 
mechanical common element component statements on the present condition 
of all accessible structural and mechanical components material to the 
use and enjoyment of the condominium. These statements must be 
completed by a registered professional engineer and/or architect prior 
to the guaranty of the first unit loan in the project. Each statement 
must also give an estimate of the expected useful life of the roof, 
elevators, heating and cooling, plumbing and electrical systems 
assuming normal maintenance. A minimum of 10 years estimated remaining 
useful life is required on all structural and mechanical components. In 
the alternative, the declarant may contribute an amount of funds to the 
condominium reserve fund equal to a minimum of \1/10\ (one-tenth) of 
the estimated costs of replacement of a major structural or mechanical 
component (as determined by an independent registered professional 
architect or engineer) for each year of estimated remaining useful life 
less than 10 years, e.g. 7 years remaining useful life equals a \3/10\ 
required declarant contribution to the reserve fund of the component's 
estimated replacement cost. The noted statements and remaining useful 
life requirement are not applicable to existing resale conversion 
projects when the declarant is no longer marketing units and/or in 
control of the association. Expandable or series condominium 
conversions require engineering and architectural statements on each 
stage or phase.
    (ii) In declarant controlled projects, a statement(s) by the local 
authority(ies) of the adequacy of offsite utilities servicing the site 
(e.g., sanitary or water) is required. If a local authority(ies) 
declines to issue such a statement(s), a statement(s) may be obtained 
from a registered professional engineer. If local authority(ies) 
declines to issue such a statement(s), a statement(s) may be obtained 
from a registered professional engineer.
    (c) Presale requirements:
    (1) Proposed construction or existing declarant in control. Bona 
fide

[[Page 6364]]

agreements of sale must have been executed by purchasers other than the 
declarant (who are obligated contractually to complete the purchase) of 
70 percent of the total number of units in the project. Lenders shall 
certify as to satisfaction of the presale requirement prior to VA 
guaranty of the first unit loan. When a declarant can demonstrate that 
a lower percentage would be justified, the Secretary, on an individual 
case basis, may approve a presale requirement of less than 70 percent. 
Reduction of the 70 percent presale requirement will be considered 
when:
    (i) Strong initial sales demonstrate a ready market, or
    (ii) The declarant will provide cash assets or acceptable bonds for 
payment of full common area assessments to the owners' association 
until such assessments are assumed by unit purchasers, or
    (iii) Subsequent phases of an overall development are being 
undertaken in a proven market area, or
    (iv) Previous experience in similar projects in the same market 
area indicates strong market acceptance, or
    (v) The development is in a market area that has repeatedly 
indicated acceptance of such projects.
    (2) Multiphase--proposed or existing declarant in control. The 
requirements of paragraph (c)(1) of this section shall apply to each 
individual phase of a multiphase development, taking into consideration 
that each individual phase must be capable of self-support in the event 
that the developer does not complete all planned phases.
    (d) Warranty. Except in condominium conversion projects, each CRV 
(Certificate of Reasonable Value) issued by the Secretary relating to a 
proposed or existing not previously occupied dwelling unit in a 
condominium project shall be subject to the express condition that the 
builder, seller, or the real party in interest in the transaction shall 
deliver to the veteran purchasing the dwelling unit with the aid of a 
guaranteed or insured loan a warranty against defects for the unit and 
common elements. The unit shall be warranted for 1 year from the date 
of settlement or the date of occupancy (whichever first occurs). The 
common elements shall be warranted for 2 years from the date each of 
the common elements is completed and available for use by the unit 
owners, or 2 years from the date the first unit is conveyed to a unit 
owner other than the declarant, whichever is later, in the particular 
phase of the condominium containing the common element. For these 
purposes, defects shall be those items reasonably requiring the repair, 
renovation, restoration, or replacement of any of the components 
constituting the unit or common elements. Items of maintenance relating 
to the unit or common elements are not covered by the warranty. No 
certificate of guaranty or insurance credit shall be issued unless a 
copy of such warranty, duly receipted by the purchaser, is submitted 
with the loan papers.
    (e) Ownership and operation of offsite facilities--(1) Title 
requirements. Evidence must be presented that the offsite facility 
owned by an owners' association with mandatory membership by 
condominium unit owners or condominium unit owners' associations has 
been completed and conveyed free of encumbrances by the declarant for 
the benefit of the unit owners with title insured by an owner's title 
policy or other acceptable title evidence. Offsite facilities conveyed 
to a nonprofit corporation are the preferred method of offsite 
facilities ownership; however, the Secretary will consider other forms 
of ownership on an individual case basis.
    (2) Mandatory membership. The declaration of the condominium (each 
condominium in a series development) and the legal documentation of the 
corporation or association which owns the offsite facility must provide 
the following:
    (i) The owner of a condominium unit is automatically a member of 
the offsite facility corporation or association and that upon the sale 
of the unit, membership is transferred automatically to the new owner/
purchaser. It is also acceptable if each condominium owners' 
association (in lieu of each individual unit owner) is automatically a 
member of the offsite facility corporation or association coupled with 
use rights for each of the unit owners or residents. If membership in 
an offsite owners' association is voluntary, no credit in the CRV 
valuation may be given for such offsite amenities.
    (ii) Each member of the offsite facility corporation or association 
must be entitled to a representative vote at meetings of the offsite 
facility corporation or association. If the individual condominium 
owners' association is a member of the offsite facility corporation or 
association, each condominium owners' association must be entitled to a 
representative vote at meetings of the offsite facility corporation or 
association.
    (iii) Each member must agree by acceptance of the unit deed to pay 
a share of the expenses of the offsite facility corporation or 
association as assessed by the corporation or association for upkeep, 
insurance, reserve fund for replacements, maintenance and operation of 
the offsite facility. The share of said expenses shall be determined 
equitably. Failure to pay such assessment must result in a lien against 
the individual unit in the same manner as unpaid assessments by the 
association of owners of the condominium. If each condominium owners' 
association is a member of the offsite facility in lieu of individual 
unit owners, failure of the condominium owners' association to pay its 
equitable assessment to the offsite facility must result in an 
enforceable lien.
    (3) Declarant payment of offsite facility in a series project. 
Until the declarant has completed all of the intended condominium 
phases in a total condominium development or established each 
condominium regime by filing a separate declaration in a series 
development, the balance of the total sum of the expenses of the 
offsite facility not covered by the assessment against the unit owners 
should be assessed against and be payable by the declarant commencing 
on the first day of the first month after the first unit is conveyed to 
a homeowner in the first phase. If this balance is not paid, it must 
become a lien against those parcels of land in the development area 
which are owned by the declarant. The collection of such debt and 
enforcement of such lien may be by foreclosure or such other remedies 
afforded the corporation or association under local law.
    (f) Professional management. Many condominiums are small enough and 
their common areas so minimal that professional management is not 
necessary. VA does not have a requirement for professional management 
of condominiums. The powers given to the owners' association by the 
declaration and bylaws are fundamentally for ``use control'' and 
maintenance of the undivided interest all of the owners have in the 
common areas. These powers normally include management which may, if 
desired, be delegated to a professional manager. However, if the board 
of directors wants professional management, the management agreement 
must be terminable for cause upon 30 days' notice, and run for a 
reasonable period of from 1 to 3 years and be renewable for consent of 
the association and the management. (Management contracts negotiated by 
the declarant should not exceed 2 years.)
    (g) Commercial areas. With respect to existing and proposed 
condominiums, commercial areas within condominium developments are 
acceptable, but such interests will be considered in value.


[[Page 6365]]


(Authority: 38 U.S.C. 3703(c)(2), 3710(a)(6))

(The Office of Management and Budget has approved the information 
collection requirements in this section under control number 2900-
0448.)


Sec.  36.4867  Requirement of construction warranty.

    Each certificate of reasonable value issued by the Secretary 
relating to a proposed or newly constructed dwelling unit, except those 
covering one-family residential units in condominium housing 
developments or projects within the purview of Sec. Sec.  36.4860 
through 36.4865, shall be subject to the express condition that the 
builder, seller, or the real party in interest in the transaction shall 
deliver to the veteran constructing or purchasing such dwelling with 
the aid of a guaranteed or insured loan a warranty, in the form 
prescribed by the Secretary, that the property has been completed in 
substantial conformity with the plans and specifications upon which the 
Secretary based the valuation of the property, including any 
modifications thereof, or changes or variations therein, approved in 
writing by the Secretary, and no certificate of guaranty or insurance 
credit shall be issued unless a copy of such warranty duly receipted by 
the purchaser is submitted with the loan papers.

(Authority: 38 U.S.C. 3703(c)(1), 3705)


Sec.  36.4868  Nondiscrimination and equal opportunity in housing 
certification requirements.

    (a) Any request for a master certificate of reasonable value on 
proposed or existing construction, and any request for appraisal of 
individual existing housing not previously occupied, which is received 
on or after November 21, 1962, will not be assigned for appraisal prior 
to receipt of a certification from the builder, sponsor or other 
seller, in the form prescribed by the Secretary, that neither it nor 
anyone authorized to act for it will decline to sell any property 
included in such request to a prospective purchaser because of his or 
her race, color, religion, sex or national origin.
    (b) On requests for appraisal of individual proposed construction 
received on or after November 21, 1962, the prescribed 
nondiscrimination certification will be required if the builder is to 
sell the veteran the lot on which the dwelling is to be constructed, 
but will not be required if:
    (1) The veteran owns the lot; or
    (2) The lot is being acquired by the veteran from a seller other 
than the builder and there is no identity of interest between the 
builder and the seller of the lot.
    (c) Each builder, sponsor or other seller requesting approval of 
site and subdivision planning shall be required to furnish a 
certification, in the form prescribed by the Secretary, that neither it 
nor anyone authorized to act for it will decline to sell any property 
included in such request to a prospective purchaser because of his or 
her race, color, religion, sex or national origin. Site and subdivision 
analysis will not be commenced by the Department of Veterans Affairs 
prior to receipt of such certification.
    (d) No commitment shall be issued and no loan shall be guaranteed 
or insured under 38 U.S.C. chapter 37 unless the veteran certifies, in 
such form as the Secretary shall prescribe, that
    (1) Neither he/she, nor anyone authorized to act for him/her, will 
refuse to sell or rent, after the making of a bona fide offer, or 
refuse to negotiate for the sale or rental of, or otherwise make 
unavailable or deny the dwelling or property covered by this loan to 
any person because of race, color, religion, sex, or national origin;
    (2) He/she recognizes that any restrictive covenant on the property 
relating to race, color, religion, sex or national origin is illegal 
and void and any such covenant is specifically disclaimed; and
    (3) He/she understands that civil action for preventive relief may 
be brought by the Attorney General of the United States in any 
appropriate U.S. District Court against any person responsible for a 
violation of the applicable law.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4869  Correction of structural defects.

    (a) The purpose of this section is to specify the types of 
assistance that the Secretary may render pursuant to 38 U.S.C. 3727 to 
an eligible borrower who has been unable to secure satisfactory 
correction of structural defects in a dwelling encumbered by a mortgage 
securing a guaranteed, insured or direct loan, and the terms and 
conditions under which such assistance will be rendered.
    (b) A written application for assistance in the correction of 
structural defects shall be filed by a borrower under a guaranteed, 
insured or direct loan with the Director of the Department of Veterans 
Affairs office having loan jurisdiction over the area in which the 
dwelling is located. The application must be filed not later than 4 
years after the date on which the first direct, guaranteed or insured 
mortgage loan on the dwelling was made, guaranteed or insured by the 
Secretary. A borrower under a direct, guaranteed or insured mortgage 
loan on the same dwelling which was made, guaranteed or insured 
subsequent to the first such loan shall be entitled to file an 
application if it is filed not later than 4 years after the date on 
which such first loan was made, guaranteed or insured by the Secretary.
    (c) An applicant for assistance under this section must establish 
that:
    (1) The applicant is the owner of a one- to four-family dwelling 
which was inspected during construction by the Department of Veterans 
Affairs or the Federal Housing Administration.
    (2) The applicant is an original veteran-borrower on an outstanding 
guaranteed, insured or direct loan secured by a mortgage on such 
dwelling which was made, guaranteed or insured on or after May 8, 1968. 
The Secretary may, however, recognize an applicant who is not the 
original veteran-borrower but who contracted to assume such borrower's 
personal obligation thereunder, if the Secretary determines that such 
recognition would be in the best interests of the Government in the 
particular case.
    (3) There exists in such dwelling a structural defect, not the 
result of fire, earthquake, flood, windstorm, or waste, which seriously 
affects the livability of the dwelling.
    (4) The applicant has made reasonable efforts to obtain correction 
of such structural defect by the builder, seller, or other person or 
firm responsible for the construction of the dwelling.
    (d) In those instances in which the Secretary determines that 
assistance under this section is appropriate and necessary the 
Secretary may take any of the following actions:
    (1) Pay such amount as is reasonably necessary to correct the 
defect, or
    (2) Pay the claim of the borrower for reimbursement of the 
borrower's expenses for correcting or obtaining correction of the 
defect, or
    (3) Acquire title to the property upon terms acceptable to the 
borrower and the holder of the guaranteed or insured loan.
    (e) To the extent of any expenditure made by the Secretary pursuant 
to paragraph (d) of this section the Secretary shall be subrogated to 
any legal rights the borrower or applicant described in paragraph 
(c)(2) of this section may have against the builder, seller, or other 
persons arising out of the structural defect or defects.
    (f) The borrower shall not be entitled, as a matter of right, to 
receive the assistance in the correction of structural defects provided 
in this section. Any determination made by the Secretary in

[[Page 6366]]

connection with a borrower's application for assistance shall be final 
and conclusive and shall not be subject to judicial or other review. 
Authority to act for the Secretary under this section is delegated to 
the Under Secretary for Benefits.
    (g) For the purpose of this section, the term ``structural defects 
seriously affecting livability'' shall in no event be deemed to 
include--
    (1) Defects of any nature in a dwelling in respect to which the 
applicant for assistance under this section was the builder or general 
contractor, or
    (2) Structural features, improvements, amenities, or equipment 
which were not taken into account in the Secretary's determination of 
reasonable value.

(Authority: 38 U.S.C. 3703(c)(1), 3727)


Sec.  36.4870  Advertising and solicitation requirements.

    Any advertisement or solicitation in any form (e.g., written, 
electronic, oral) from a private lender concerning housing loans to be 
guaranteed or insured by the Secretary:
    (a) Must not include information falsely stating or implying that 
it was issued by or at the direction of VA or any other department or 
agency of the United States, and
    (b) Must not include information falsely stating or implying that 
the lender has an exclusive right to make loans guaranteed or insured 
by VA.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4875  Insured loan and insurance account.

    (a) Loans otherwise eligible may be insured when purchased by a 
lender eligible under 38 U.S.C. 3703(a) if the purchaser (lender) 
submits with the loan report evidence of an agreement, general or 
special, made prior to the closing of the loan, to purchase such loan 
subject to its being insured.
    (b) A current account shall be maintained in the name of each 
insured lender or purchaser. The account shall be credited with the 
appropriate amounts available for the payment of losses on insured 
loans made or purchased. The account shall be debited with appropriate 
amounts on account of transfers, purchases under Sec.  36.4820, or 
payment of losses. The Secretary may on 6 months' notice close any 
lender's insurance account. Such account after expiration of the 6-
month period shall be available only as to loans embraced therein.
    (c) Amounts received or recovered by the Secretary or the holder 
with respect to a loan after payment of an insured claim thereon will 
not restore any amount to the holder's insurance account.

(Authority: 38 U.S.C. 3703(a)(2))


Sec.  36.4877  Transfer of insured loans.

    (a) In cases involving the transfer from one insured financial 
institution to another insured institution of loans which are 
transferred without recourse, guaranty, or repurchase agreement, if no 
payment on any loan included in the transfer is past due more than one 
calendar month at the time of transfer there shall be transferred from 
the insurance account of the transferor to the insurance account of the 
transferee an amount equal to the original percentage credited to the 
insurance account in respect to each loan being transferred applied to 
the unpaid balance of such loans, or to the purchase price, whichever 
is the lesser.
    (b) Transfers between insurance accounts in a manner or under 
conditions not provided in paragraph (a) of this section must have the 
prior approval of the Secretary.
    (c) Where loans are transferred with recourse or under a guaranty 
or repurchase agreement no insurance credit will be transferred or 
insurance account affected and no reports will be required.
    (d) In all cases of transfer of loans from one insured financial 
institution to another insured institution, except as provided in 
paragraph (c) of this section, a report on a prescribed form executed 
by the parties and showing their agreement with regard to the transfer 
of insurance credits shall be made to the Secretary.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4878  Debits and credits to insurance account under Sec.  
36.4820.

    In the event that an insured loan is transferred under the 
provisions of Sec.  36.4820, there shall be charged to the insurance 
account of the transferor a sum equal to the amount paid transferor on 
account of the indebtedness less the current market value of the 
property transferred as security therefor as determined by an appraiser 
designated by the Secretary, or the amount chargeable to such insurance 
account in the event of a transfer under Sec.  36.4877, whichever sum 
is the greater. The credit to the insurance account of the transferee 
will be computed in accordance with Sec.  36.4877(a).

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4879  Payment of insurance.

    (a) Upon the continuance of a default for a period of three months, 
the holder may proceed to establish the net loss, after giving the 
notices prescribed in Sec. Sec.  36.4817 and 36.4850 if security is 
available. The net loss shall be reported to the Secretary with proper 
claim, whereupon the holder shall be entitled to payment of the claim 
within the amount then available for such payment under the payee's 
related insurance account. Subject to the provisions of the paragraph 
(b) of this section and to Sec.  36.4875(b) a supplemental claim for 
any balance of an insurance loss may be filed at any time within 5 
years after the date of the original claim.
    (b) The basis of the claim for an insured loss shall consist in the 
unrealized principal or the amount paid for the obligation, if less, 
plus unrealized interest to the date of claim or the date of sale 
whichever is earlier, and those expenses, if any, allowable under Sec.  
36.4814, but subject to proper credits because of payments, set-off, 
proceeds of security or otherwise, provided that if there is no 
liquidation of security the claim shall not include an accrual of 
interest for a period in excess of 6 months from the date of the first 
uncured default.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4880  Reports of insured institutions.

    An insured financial institution shall make such reports respecting 
its insurance accounts as the Secretary may from time to time require, 
not more frequently than semiannually.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4890  Purpose.

    Sections 36.4890 through 36.4893 are promulgated to achieve the 
aims of the applicable provisions of Executive Orders 11246 and 11375 
and the regulations of the Secretary of Labor with respect to federally 
assisted construction contracts.


Sec.  36.4891  Applicability.

    (a) For the purposes of the home loan guaranty and insurance and 
direct loan programs of the Department of Veterans Affairs, the term 
``applicant for Federal assistance'' or ``applicant'' in Part III of 
Executive Order 11246, shall mean the builder, sponsor or developer of 
land to be improved by such builder, sponsor or developer for the 
purpose of constructing housing thereon for sale to eligible veterans 
with financing which is to be guaranteed or insured or made under the 
provisions of 38 U.S.C. chapter 37, or the builder, sponsor or 
developer of housing to be constructed for sale to eligible veterans 
with financing which is to be guaranteed or insured or made under the 
provisions of 38 U.S.C. chapter 37.

[[Page 6367]]

    (b) The provisions of Executive Orders 11246 and 11375 and the 
rules and regulations of the Secretary of Labor are applicable to:
    (1) Each Master Certificate of Reasonable Value or extension or 
modification thereof relating to proposed construction issued on or 
after July 22, 1963;
    (2) Each individual Certificate of Reasonable Value or extension or 
modification thereof relating to proposed construction issued on or 
after July 22, 1963, except as provided in paragraph (c)(2) of this 
section;
    (3) Each Special Conditions Letter or modification thereof issued 
on or after July 22, 1963, in respect to site approval of land to be 
improved by a builder, sponsor or developer for the construction of 
housing thereon; and
    (4) Each direct loan fund reservation commitment or extension 
thereof issued to builders on or after July 22, 1963.
    (c) The provisions of Executive Orders 11246 and 11375 and the 
rules and regulations of the Secretary of Labor are not applicable to:
    (1) Grants under chapter 21, title 38, U.S.C.;
    (2) Individual Certificates of Reasonable Value issued on or after 
July 22, 1963, if:
    (i) The certificate relates to existing properties, either 
previously occupied or unoccupied; or
    (ii) The certificate relates to proposed construction and--
    (A) A veteran was named in the request for appraisal, or
    (B) A veteran contracted for the construction or purchase of the 
home prior to issuance of the certificate, or
    (C) The property was listed in the Schedule of Reasonable Values on 
an outstanding Master Certificate of Reasonable Value issued prior to 
July 22, 1963;
    (3) Any contract or subcontract for construction work not exceeding 
$10,000; and
    (4) Any other contract or subcontract which is exempted or excepted 
by the regulations of the Secretary of Labor.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4892  Certification requirements.

    In any case in which Sec. Sec.  36.4890 through 36.4893 are 
applicable, as set forth in Sec.  36.4891, no action will be taken by 
the Department of Veterans Affairs on any request for appraisal 
relating to proposed construction, site approval of land to be improved 
by a builder, sponsor or developer for the construction of housing 
thereon, or for a direct loan fund reservation commitment unless the 
builder, sponsor or developer has furnished the Department of Veterans 
Affairs a signed certification in form as follows:

    To induce the Department of Veterans Affairs to act on any 
request submitted by or on behalf of the undersigned for site 
approval of land to be improved for the construction of housing 
thereon to be financed with loans guaranteed, insured or made by the 
Department of Veterans Affairs, or for establishment by the 
Department of Veterans Affairs of reasonable value relating to 
proposed construction or for direct loan fund reservation 
commitments, the undersigned hereby agrees that it will incorporate 
or cause to be incorporated into any contract for construction work 
or modification thereof, as defined in the rules and regulations of 
the Secretary of Labor relating to the land or housing included in 
its request to the Department of Veterans Affairs the following 
equal opportunity clause:
    During the performance of this contract the contractor agrees as 
follows:
    (1) The contractor will not discriminate against any employee or 
applicant for employment because of race, color, religion, sex or 
national origin. The contractor will take affirmative action to 
ensure that applicants are employed, and that employees are treated 
during employment without regard to their race, color, religion, sex 
or national origin. Such action shall include, but not be limited to 
the following: Employment, upgrading, demotion or transfer; 
recruitment or recruitment advertising; layoff or termination; rates 
of pay or other forms of compensation; and selection for training, 
including apprenticeship. The contractor agrees to post in 
conspicuous places, available to employees and applicants for 
employment, notices to be provided setting forth the provisions of 
this nondiscrimination clause.
    (2) The contractor will, in all solicitations or advertisements 
for employees placed by or on behalf of the contractor, state that 
all qualified applicants will receive consideration for employment 
without regard to race, color, religion, sex or national origin.
    (3) The contractor will send to each labor union or 
representative of workers with which he has a collective bargaining 
agreement or other contract or understanding, a notice to be 
provided advising the said labor union or workers' representative of 
the contractor's commitments under section 202 of Executive Order 
11246 of September 24, 1965, and shall post copies of the notice in 
conspicuous places available to employees and applicants for 
employment.
    (4) The contractor will comply with all provisions of Executive 
Order 11246 of September 24, 1965, and of the rules, regulations and 
relevant orders of the Secretary of Labor.
    (5) The contractor will furnish all information and reports 
required by Executive Order 11246 of September 24, 1965, and by the 
rules, regulations and orders of the Secretary of Labor, or pursuant 
thereto, and will permit access to his books, records and accounts 
by the administering agency and the Secretary of Labor for purposes 
of investigation to ascertain compliance with such rules, 
regulations and orders.
    (6) In the event of the contractor's noncompliance with the 
nondiscrimination clauses of this contract or with any of the said 
rules, regulations or orders, this contract may be canceled, 
terminated or suspended in whole or in part and the contractor may 
be declared ineligible for further Government contracts or federally 
assisted construction contracts in accordance with procedures 
authorized in Executive Order 11246 of September 24, 1965, and such 
other sanctions may be imposed and remedies invoked as provided in 
Executive Order 11246 of September 24, 1965, or by rule, regulation 
or order of the Secretary of Labor, or as otherwise provided by law.
    (7) The contractor will include the provisions of paragraphs (1) 
through (7) in every subcontract or purchase order unless exempted 
by rules, regulations or orders of the Secretary of Labor issued 
pursuant to section 204 of Executive Order 11246 of September 24, 
1965, so that such provisions will be binding upon each 
subcontractor or vendor. The contractor will take such action with 
respect to any subcontract or purchase order as the administering 
agency may direct as a means of enforcing such provisions, including 
sanctions for noncompliance: Provided, however, That in the event a 
contractor becomes involved in, or is threatened with, litigation 
with a subcontractor or vendor as a result of such direction by the 
agency, the contractor may request the United States to enter into 
such litigation to protect the interests of the United States.
    Except in special cases and in subcontracts for the performance 
of construction work at the site of construction, the clause is not 
required to be inserted in subcontracts below the second tier. 
Subcontracts may incorporate by reference the equal opportunity 
clause.
    The undersigned further agrees that it will be bound by the 
above equal opportunity clause in any federally assisted 
construction work which it performs itself other than through the 
permanent work force directly employed by an agency of Government.
    The undersigned agrees that it will cooperate actively with the 
administering agency and the Secretary of Labor in obtaining the 
compliance of contractors and subcontractors with the equal 
opportunity clause and the rules, regulations and relevant orders of 
the Secretary of Labor, that it will furnish the administering 
agency and the Secretary of Labor such information as they may 
require for the supervision of such compliance, and that it will 
otherwise assist the administering agency in the discharge of the 
agency's primary responsibility for securing compliance. The 
undersigned further agrees that it will refrain from entering into 
any contract or contract modification subject to Executive Order 
11246 with a contractor debarred from, or who has not demonstrated 
eligibility for, Government contracts and federally assisted 
construction contracts pursuant to Part II, Subpart D of Executive 
Order 11246 and will carry out such sanctions and penalties for 
violation of the equal opportunity clause as may be imposed upon the 
contractors and subcontractors by the administering agency

[[Page 6368]]

or the Secretary of Labor pursuant to Part II, Subpart D of 
Executive Order 11246.
    In addition, the undersigned agrees that if it fails or refuses 
to comply with these undertakings such failure or refusal shall be a 
proper basis for cancellation by the Department of Veterans Affairs 
of any outstanding master certificates of reasonable value or 
individual certificates of reasonable value relating to proposed 
construction, except in respect to cases in which an eligible 
veteran has contracted to purchase a property included on such 
certificates, and for the rejection of future requests submitted by 
the undersigned or on his or her behalf for site approval, appraisal 
services, and direct loan fund reservation commitments until 
satisfactory assurance of future compliance has been received from 
the undersigned, and for referral of the case to the Department of 
Justice for appropriate legal proceedings.

(Authority: 38 U.S.C. 3703(c)(1))


Sec.  36.4893  Complaint and hearing procedure.

    (a) Upon receipt of a written complaint signed by the complainant 
to the effect that any person, firm or entity has violated the 
undertakings referred to in Sec.  36.4892, such person, firm or other 
entity shall be invited to discuss the matter in an informal hearing 
with the Director of the Department of Veterans Affairs regional office 
or center.
    (b) If the existence of a violation is denied by the person, firm 
or other entity against which a complaint has been made, the Director 
or designee shall conduct such inquiries and hearings as may be deemed 
appropriate for the purpose of ascertaining the facts.
    (c) If it is found that the person, firm or other entity against 
which a complaint has been made has not violated the undertakings 
referred to in Sec.  36.4892, the parties shall be so notified.
    (d) If it is found that there has been a violation of the 
undertakings referred to in Sec.  36.4892, the person, firm or other 
entity in violation shall be requested to attend a conference for the 
purpose of discussing the matter. Failure or refusal to attend such a 
conference shall be proper basis for the application of sanctions.
    (e) The conference arranged for discussing a violation shall be 
conducted in an informal manner and shall have as its primary objective 
the elimination of the violation. If the violation is eliminated and 
satisfactory assurances are received that the person, firm or other 
entity in violation will comply with the undertakings pursuant to Sec.  
36.4892 in the future, the parties concerned shall be so notified.
    (f) Failure or refusal to comply and give satisfactory assurances 
of future compliance with the equal employment opportunity requirements 
shall be proper basis for applying sanctions. The sanctions shall be 
applied in accordance with the provisions of Executive Order 11246 as 
amended and the regulations of the Secretary of Labor.
    (g) Upon written application, a complainant or a person, firm or 
other entity against which a complaint has been filed may apply to the 
Under Secretary for Benefits for a review of the action taken by a 
Director. Upon receiving such application, the Under Secretary for 
Benefits may designate a representative or representatives to conduct 
an informal hearing and to make a report of findings. The Under 
Secretary for Benefits may, after a review of such report, modify or 
reverse an action taken by a Director.
    (h) Reinstatement of restricted persons, firms or other entities 
shall be within the discretion of the Under Secretary for Benefits and 
under such terms as the Under Secretary for Benefits may prescribe.

(Authority 38 U.S.C. 3703(c)(1))

[FR Doc. 08-337 Filed 1-25-08; 8:45 am]
BILLING CODE 8320-01-P